Plantations sector - OCBC Investment 2016-12-12: Demand would have to be robust next year

Plantations sector - OCBC Investment 2016-12-12: Demand would have to be robust next year Plantation Sector WILMAR INTERNATIONAL LIMITED F34.SI GOLDEN AGRI-RESOURCES LTD E5H.SI

Plantations sector - Demand would have to be robust next year

  • CPO price to be supported into early 2017.
  • Signs of ample supplies further ahead.
  • Price may correct if demand does not hold up.

Strong gains for palm oil price thus far 

  • For the plantations sector thus far, CPO prices have recorded strong gains YTD on declining production and tightening inventories post El Nino, in addition to a depreciating Ringgit. 
  • There were some signs of a slowdown in demand for palm oil while alternative sources were volatile in prices but getting cheaper. The recent higher crude oil prices and soy oil prices in the near term could give a lift to CPO prices. 
  • Over the weekend, non-OPEC producers agreed to join supply cuts by more than 500k barrels a day, and Saudi Arabia announced it is ready to cut oil production more than what they committed to on Nov 30. 
  • Soy oil price also rose after the US government announced in late Nov a raise to 2017 biofuel blending requirements.

Low base effect as supply expected to rebound 

  • The consensus view expects CPO production to rebound next year, with some indicating it to at least return to 2015 levels, and the Indonesian Palm Oil Producers Association (Gapki) sees national production rising by 10-15% next year.
  • At this juncture, weather conditions seem supportive for harvesting as weather forecasters do not expect a strong La Nina event to occur.
  • The National Oceanic and Atmospheric Administration (NOAA) sees a ~55% chance for La Nina to persist through the winter, followed by a transition to ENSO-neutral for 1Q171 . Thus ample supplies may limit the increase in palm oil prices next year. As of Oct-16, OCBC Treasury Research and Strategy expects the seasonally lower palm oil production in Malaysia and Indonesia to support prices above MYR2,700/MT into early 2017, with a MYR2,900/MT target for 1Q17.

Domestic demand to lend some support 

  • On demand prospects for palm oil, much has been documented about biofuel mandates in Indonesia and Malaysia to raise domestic consumption. Indonesia had increased palm oil content in biodiesel from 15% to 20% this year, and a government agency reportedly expects domestic demand for CPO’s use in biodiesel to grow ~70% by 2020, driven by higher subsidies for blending. 
  • In addition, given recent developments for crude oil, biodiesel’s price premium over gas-oil’s may narrow and support biodiesel demand. Importantly, demand from key markets China, India and Europe will also have to stay robust for CPO prices to sustain.
  • China has been selling their reserves of rapeseed oil, which have led to a decline in their palm oil imports, but the Malaysian Palm Oil Council recently noted signs of a pick up in demand from China2 .

Neutral stance on sector 

  • All considered, we are NEUTRAL on the plantations sector. 
  • Given signs of ample supplies and some uncertainty over demand, OCBC Treasury estimates that CPO price may correct to MYR2,650/MT for 4Q17. 
  • Within the sector, we have a hold rating on both Golden Agri Resources [Hold, S$0.37] and Wilmar International [Hold, S$3.18].

Jodie Foo OCBC Investment | http://www.ocbcresearch.com/ 2016-12-12
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