Plantation Companies - DBS Research 2015-11-11: Worsening oversupply

Plantation WILMAR INTERNATIONAL LIMITED F34.SI FIRST RESOURCES LIMITED EB5.SI INDOFOOD AGRI RESOURCES LTD. 5JS.SI BUMITAMA AGRI LTD. P8Z.SI

Plantation Companies - Worsening oversupply

Malaysia’s Oct-15 palm oil output unexpectedly rose 4% m-o-m to 2.04m MT; and brought ending stockpile to record 2.83m MT
Steady imports offset 2% m-o-m growth in exports
Malaysia CY15F palm oil output raised to 20.10m MT; Nov-15 output expected to drop 14% m-o-m to 1.75m MT
Top pick: Wilmar

Oct-15 palm oil output unexpectedly expanded by 4% m-o-m to 2.04m MT – or 10% above our forecast of 1.85m MT – thanks to a strong 6% m-o-m recovery in Fresh Fruit Bunch (FFB) yields in East Malaysia; offsetting a 3% decline in Peninsular Malaysia (vs. 3% m-o-m drop in Peninsular Malaysia and 0.6% m-o-m rise in East Malaysia during the same period last year).
We suspect this was due to delayed ripening in previous months due to dry weather. With two more months left in the year, we adjusted Malaysia’s CY15F output to 20.10m MT from 19.73m MT and expect Nov-15 palm oil output to drop 14% m-o-m to 1.75m MT – in line with historical low crop season.

Spurred by low prices, Oct-15 palm oil exports continued to expand, by 2% m-o-m to 1.712m MT (or 3% higher than expected) – led by shipments to India; offset by lower demand from China and Japan.
We suspect fears of lower oilseed output in India (due to below-normal monsoon) and lower inventory had prompted purchases ahead of further inventory drawdown. For this reason, we expect Nov-15 exports to expand 7% mo-m towards 1.83m MT.

As at end-Oct-15, Malaysia’s palm oil stockpile reached 2.83m MT (all-time high) – or 11% ahead of forecast. Offsetting higher exports, imports remained steady at 73k MT – probably reflecting a price disparity.
Having adjusted our forecasts, we now expect palm oil imports to come in at 65k MT (-12% m-o-m) and therefore resulting in Nov-15 stockpile of 2.61m MT. This represents stock/usage (exports + domestic consumption) ratio of 12.5% - down from 13.5% at end-Oct-15.

A prospective drop in palm oil output from both seasonal and weather drivers is expected to lend support to palm oil prices. However, downside risks in Indonesian biodiesel demand and potential release of Argentine soybean inventory may continue to put a cap on palm oil price strength over the next six months.
We believe a stable price environment and ramp up in Indonesia’s B15/B20 mandate should continue to benefit Wilmar, which remains our top pick in the sector.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2015-11-11

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