Palm oil stocks set to surge as Indonesia said to be scaling back export overhaul: analysts

[SINGAPORE] Indonesian palm oil equities are positioned for a dramatic and rapid reversal following a brutal sell-off in late May and early June, noted analysts, citing a report that said that Indonesia will scale back its export overhaul.

The country is doing so after buyers and exporters raised concerns over its controversial proposal to centralise the export of its strategic commodities, according to a report by The Straits Times. There has been no official confirmation by the Indonesian government.

Jakarta on May 20 announced a sweeping directive, requiring that all strategic shipments of coal, crude palm oil and ferroalloys be channelled solely through a newly minted state-owned entity known as Danantara Sumberdaya Indonesia (DSI).

RHB analysts on Monday (Jun 15) noted that the reported move, if confirmed, could avert a major international trade bottleneck just as a looming El Nino weather pattern threatens global agricultural supply chains.

Brokerages, including UOB Kay Hian (UOBKH) and RHB, are moving to upgrade battered plantation stocks across the board. Both on Monday said that market anxieties over policy friction were heavily overblown and have created a compelling entry point for investors.

The foundation of this market reversal rests on Jakarta’s swift recalibration of the state-backed export mandate.

Indonesia now plans to impose only tighter monitoring on key commodity exports to stop exporters from understating shipment values and evading taxes, according to the ST report on Jun 11.

Dony Oskaria, the chief operating officer of sovereign wealth fund Danantara Indonesia, on Saturday sought to allay concerns that the newly established DSI would displace private exporters in Indonesia’s commodity trade. “DSI will not act as a trading middleman that buys commodities from producers and resells them overseas,” he said in a statement. “Danantara and DSI continue engaging with industry stakeholders to ensure the implementation of DSI’s mandate remains consistent and does not disrupt export activities.”

Supply chain disruptions less likely

CGS International economists noted that Indonesia’s original intention was to centralise execution to prevent offshore leakages and address government claims that massive amounts of commodity exports had been historically under-invoiced.

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However, the execution timeline proved overly ambitious, and UOBKH said that government officials clearly signalled a major scale-back of the mandate just 11 days into the initial transition phase.

Its analyst Amerul Iqmal said that DSI is fundamentally shifting its operational posture from a rigid gatekeeper to a pricing auditor, citing the ST report.

Independent exporters will thus maintain their direct commercial relationships with overseas buyers, but will have to thoroughly justify their declared export prices against established market benchmarks to curb alleged transfer pricing and under-invoicing.

The brokerage emphasised that this pivot preserves vital international trade flows and completely removes the worst-case supply disruption bottleneck that spooked equity markets earlier in the month.

The rupiah was also affected as it breached the 14,000 threshold against the Singapore dollar and depreciated to an all-time low against the US dollar.

While tighter customs monitoring and reporting deadlines remain an ongoing policy feature, researchers at RHB added that the likelihood of severe, systemic supply chain delays is now significantly mitigated.

Reversing the regulatory discount

With the spectre of a state-monopolised export system fading, regional equity analysts are turning highly constructive on upstream planters that were severely penalised by the recent regulatory overhang.

Prior to the policy clarification, Macquarie analyst Ari Jahja observed that the sheer uncertainty had driven massive foreign net equity outflows, leaving the Jakarta Composite Index as the worst-performing emerging-market index on a US dollar basis.

Jahja highlighted that many domestic stocks are now trading at deeply discounted multiples of negative one to negative two standard deviations.

The plantation sector bore the brunt of this panic. UOBKH pointed out that leading companies experienced severe share-price contractions, prompting the brokerage to formally upgrade First Resources to a “buy” rating with a target price of S$3.65.

Amerul noted that First Resources plunged 23 per cent after the export framework was first announced. The palm oil producer’s shares have climbed about 14 per cent since Jun 12, a day after the ST report, advancing from S$2.83 to S$3.23 as at 10.40 am on Thursday.

Similarly, the brokerage reiterated a “buy” rating on Bumitama Agri with a target price of S$2.01, highlighting that both of these Indonesian-exposed companies significantly underperformed their Malaysian peers during the policy panic.

Its shares have risen nearly 9 per cent since Jun 12, from S$1.67 to S$1.82.

Concurrently, RHB explicitly upgraded the entire regional plantation sector to “overweight”, citing the narrowing regulatory discount and resilient crude palm oil prices.

El Nino storm clouds on horizon

Adding a potent macroeconomic tailwind to the regulatory relief is the official onset of extreme weather patterns, a catalyst heavily emphasised by RHB.

Its researchers noted that the US National Oceanic and Atmospheric Administration has officially issued an El Nino advisory, confirming that the disruptive weather phenomenon has developed.

They also pointed out that there is currently an 88 per cent probability that the event will intensify to a strong level during the critical growing window between November this year and January next year.

The historical precedents for palm oil markets during these periods are highly bullish, RHB said. Historical data compiled by its research team indicated that previous strong El Nino cycles in 1997 to 1998 and 2015 to 2016 slashed crop yields by 17 per cent and 14 per cent, respectively, typically materialising with a one-year lag.

RHB noted that, during those specific historical periods, average crude palm oil prices surged 21 per cent during the weather event itself, and climbed an additional 26 per cent in the year immediately following the drought conditions.

While UOBKH’s Amerul expects that the biological lag will keep near-term production relatively stable, he also forecasts that a structural supply crunch will hit the market aggressively in 2027.

For institutional investors, the combination of easing state export interference and rising crude palm oil prices presents a highly geared earnings play, according to both RHB and UOBKH.

Consequently, RHB expects significant upside risk to its baseline commodity price assumptions of RM4,400 (S$1,387) per tonne for 2026 and RM4,300 per tonne for 2027.