Soft Commodities - OCBC Investment 2019-02-20: Greater Forces At Play

Soft Commodities - OCBC Investment Research | SGinvestors.io WILMAR INTERNATIONAL LIMITED (SGX:F34) GOLDEN AGRI-RESOURCES LTD (SGX:E5H)

Soft Commodities - Greater Forces At Play

  • EU submits new draft law.
  • China to absorb some supply?
  • Monitor macro events.

EU moving forward on green palm oil plan; targeting large plantations

  • The European Union Commission recently in Feb submitted a delegated act that classified palm oil from large plantations as unsustainable and proposed that the commodity be excluded from the bloc’s biofuels target. In particular, it is mentioned that any biofuel source that leads to more than 10% of annual clearance or conversion of tropical forests, or other high-carbon stock land, should not count toward EU targets.
  • If this draft law is adopted, palm oil’s use in biodiesel in the EU will be capped at each member country’s consumption levels as of 2019 until 2023. Palm oil’s use in biodiesel in the EU will then be phased out by 2030. Some exceptions, such as palm oil produced from smallholders of 5ha or less, have been included in the draft.

Impact on prices over the medium to long term?

  • The EU accounts for about 15% of Indonesia’s 2018 palm oil exports, valued at around US$19b, according to the Indonesian Palm Oil Association. The EU is also the second largest export destination of Malaysian palm oil in 2017 after India, accounting for about 12% of the commodity’s exports. Hence the potential impact on palm oil prices should not be underestimated.
  • However, there is also the possibility of Indonesia and Malaysia boosting palm oil exports to China if demand increases; most of China’s imports are currently used for food, mainly for cooking.

Golden-Agri has greater exposure to crude palm oil

  • After declining 35% from early 2017 to end 2018, the price of crude palm oil is currently up about 10% YTD. This is likely supported by resumption in India demand, aided by recent import duty cuts, as well as higher bio-diesel demand in Indonesia – recall that Indonesia has enforced mandatory use of diesel containing 20% locally produced biofuel (B20) in all diesel machinery in the country to curb gasoil imports.
  • Meanwhile, any movement in crude palm oil prices would have a greater impact on GOLDEN AGRI-RESOURCES LTD (SGX:E5H) [Rating: HOLD; Fair Value: S$0.24], compared to WILMAR INTERNATIONAL LIMITED (SGX:F34) [Rating: HOLD; Fair Value: S$3.42] which has a much more diversified portfolio (refer to exhibits in attached PDF report).

Low Pei Han CFA OCBC Investment Research | https://www.iocbc.com/ 2019-02-20
SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.42 SAME 3.42