Indonesia CPO enters a supercycle, with falling inventories and B50 biodiesel expansion jointly pushing up prices
AI summary card
Indonesia CPO enters a supercycle, with falling inventories and B50 biodiesel expansion jointly pushing up prices
Nomura is bullish on Indonesia's palm oil value chain, believing that stagnant supply, inventories falling to a ten-year low, and expanding biodiesel demand will support high long-term CPO prices, with TAPG as the top pick, followed by DSNG and LSIP.
- The report forecasts average CPO Rotterdam prices to rise from USD1,307/ton in 2025 to USD1,412/ton in 2026F and USD1,497/ton in 2027F.
- Implementation of Indonesia's B50 is expected to add about 4mn tons of CPO demand, close to the report's estimated global demand increase of 4.7mn tons in 2026F and 2027F.
- Indonesia and Malaysia together account for about 85% of global CPO supply, and their combined inventories are projected to fall below 4mn tons in 2026/27F, a near ten-year low.
- Upstream plantation companies are expected to benefit from higher CPO prices, improved operating cash flow, and margin expansion; the report's preferred ranking is TAPG IJ, DSNG IJ, and LSIP IJ.
- Key risks are adverse Indonesian policies, DSI becoming the sole trader, lower biodiesel blending ratios, and additional taxes on the resource sector.
Report interpretation
Overview
This report focuses on Indonesia's crude palm oil (CPO) industry. Nomura believes global CPO supply may stagnate or decline in the medium term, mainly due to aging plantation trees in Indonesia and Malaysia, insufficient smallholder replanting, shortages of quality seedlings, high fertilizer prices, and inefficient operations on about 1mn hectares of seized land. Meanwhile, Indonesia's B50 biodiesel policy and higher biofuel blending ratios in more countries will structurally raise vegetable oil demand. The supply-demand gap and inventory destocking together are pushing CPO prices into a supercycle.
Core views
The core view is that demand will structurally exceed supply, and the period of elevated CPO prices may last longer than the commodity upcycle 15 years ago. The report expects Indonesia and Malaysia's CPO inventories to fall below 4mn tons in 2026/27F; Indonesia's B50 will consume a significant share of exports, and the government's long-term goal is to reduce dependence on diesel imports, potentially even pushing blending requirements beyond B50 in the future. Higher CPO prices can usually offset rising fertilizer, levy, and other costs, while upstream plantation companies are likely to see expansion in operating cash flow and EBIT margins.
Analysis framework
The report analyzes the sector from six angles: supply, demand, inventories, substitute prices, policy feasibility, and company fundamentals. It first assesses production constraints in Indonesia and Malaysia from tree age, replanting, and fertilizer use; then evaluates demand uplift from B50 and global biodiesel expansion; next explains the CPO price uptrend through inventory changes; and finally selects stocks based on production efficiency, cash cost, dividend capacity, deleveraging, and valuation discount.
Methodology notes
Inventory destocking drives price increases
The report treats Indonesia and Malaysia's inventories as an important leading indicator for CPO prices, arguing that insufficient supply growth combined with expanding biodiesel demand will push inventories to a near ten-year low, thereby supporting structurally high prices.
Target P/E of 8-12x with a 25% Indonesia discount versus Malaysia
The report values Indonesian CPO stocks using a relatively conservative 8-12x P/E and applies an average 25% discount relative to Malaysian peers to reflect government policy and ESG uncertainties.
High yield, low cash cost, dividend or deleveraging
Priority is given to companies with relatively younger tree profiles, lower unit cash costs, strong operating cash flow, and clear shareholder returns or balance sheet improvement.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- TAPG IJTop pick, upstream domestic Indonesian CPO plantation company
- Strengths
- Average tree age of about 15 years, high production efficiency, the lowest cash cost among peers, high dividend yield, and infrastructure construction largely completed.
- Weaknesses
- The report notes the company is still in a net debt position and requires ongoing annual replanting and maintenance capex.
- Comparison
- Ranks first among the three preferred stocks, ahead of DSNG and LSIP.
- Risks
- CPO price decline, adverse government policies, higher taxes and levies, and output disruption from weather or cost pressures.
- DSNG IJSecond pick, benefiting from high yields and deleveraging
- Strengths
- Relatively young tree profile, high output, and gradual debt reduction that can amplify net profit.
- Weaknesses
- Management's downstream expansion and accelerated replanting plan may constrain dividend payout ratios.
- Comparison
- Ranks second, with strong fundamental leverage but potentially weaker shareholder returns than TAPG.
- Risks
- Capex, execution of downstream expansion, deleveraging progress, and CPO price and policy risks.
- LSIP IJThird pick, re-rating supported by low valuation and net cash
- Strengths
- Relatively efficient cash cost, cheap valuation, and net cash that provides downside protection.
- Weaknesses
- An older plantation profile makes long-term production growth less elastic than TAPG and DSNG.
- Comparison
- Ranks third, with strong valuation appeal but weaker operating growth.
- Risks
- Aging plantations, output pressure, CPO price decline, and policy and tax risks.
- CPOCore commodity price variable
- Strengths
- Falling inventories, expanding biodiesel demand, high substitute vegetable oil prices, and El Niño concerns jointly support prices.
- Weaknesses
- Prices are highly affected by policy, export governance, energy spreads, and weather expectations.
- Comparison
- The report believes CPO has no ideal substitute among other vegetable oils, and substitute oils also face tight supply-demand conditions.
- Risks
- Adjustments to biodiesel policy, changes in global energy prices, or supply recovery and weaker-than-expected demand.
Key data
- CPO Rotterdam average price forecast2025 USD1,307/ton; 2026F USD1,412/ton; 2027F USD1,497/tonThe report believes international and domestic Indonesian CPO prices will show similar upward trends.
- Incremental demand from B50About 4mn tonsThe report says this increase is close to the estimated global demand increase of 4.7mn tons in 2026F and 2027F.
- Combined inventories of Indonesia and MalaysiaBelow 4mn tons in 2026/27FThe two countries together account for about 85% of global CPO supply, and inventories are expected to fall to a near ten-year low.
- Share of Indonesian smallholdersAbout 45% of planted areaSlow replanting, older tree profiles, and high funding costs among smallholders are sources of supply pressure.
- Seized land in IndonesiaClose to 1mn hectares, about 8% of Indonesia's planted areaThe report believes SOE management may result in lower output because of insufficient manpower and operational efficiency.
- Indonesia domestic average CPO price2026 YTD about IDR15,900/kg, versus IDR14,100/kg in 2025More relevant for TAPG, DSNG, and LSIP, because the report says the three companies mainly sell CPO domestically.
- TAPG IJ rating and target priceBuy, target price IDR2,500, closing price IDR1,610, implied +55.3%The report maintains Buy, highlighting younger tree age, the lowest cash cost, and strong dividend capacity.
- DSNG IJ rating and target priceBuy, target price IDR2,100, implied +71%The report initiates coverage with Buy, highlighting high yield and earnings leverage from deleveraging.
- LSIP IJ rating and target priceBuy, target price IDR2,450, closing price IDR1,340, implied +82.8%The report initiates coverage with Buy, highlighting cheap valuation, net cash, and support from high CPO prices.
Impact & implications
If the report's thesis proves correct, Indonesia's upstream CPO companies will benefit from rising prices, tight inventories, and expanding domestic biodiesel demand, with margins and operating cash flow likely to improve. Relatively speaking, companies with younger tree profiles, lower cash costs, and stronger balance sheets should have greater upside; however, valuations still need to reflect policy, ESG, and export-governance uncertainties.
Risks
- The Indonesian government introduces adverse policies, especially if DSI shifts from a monitoring intermediary to the sole trader or forms a monopsony.
- Indonesia lowers biodiesel blending requirements, leading to a clear weakening in domestic CPO demand.
- Additional taxes or levies on the resource sector directly reduce CPO company profitability.
- CPO production or inventory trends turn out better than the report expects, weakening the supercycle price thesis.
- The impacts of El Niño, fertilizer costs, and labor factors on production and costs involve time lags and uncertainty.
- ESG discounting and uncertainty around export governance may continue to weigh on Indonesian CPO stock valuations.
What to watch
- The actual rollout pace of Indonesia's B50 from 2H26 into 2027, and whether it is further expanded beyond B50.
- Changes in the Indonesian CPO fund budget, the magnitude of levy adjustments, and changes in the biodiesel-diesel price spread.
- Whether Indonesia and Malaysia's CPO inventories fall below 4mn tons as projected in the report.
- The linkage between Indonesian domestic CPO prices and Rotterdam prices, as well as the realized selling prices and margins of TAPG, DSNG, and LSIP.
- Smallholder replanting progress, quality seedling supply, fertilizer application volume, and operating efficiency on seized land.
- Whether DSI's actual role in export governance remains that of a monitoring intermediary rather than becoming the sole trader.
- Whether TAPG dividends, DSNG deleveraging, and LSIP's net cash re-rating can be realized.