Agribusiness - CGS-CIMB Research 2019-03-07: POC 2019 ~ A Better Year For CPO Price?


Agribusiness - Palm and Lauric Oils Price Outlook Conference & Exhibition 2019 ~ A Better Year For CPO Price?

  • We attended Annual Palm and Lauric Oils Conference and Exhibition Price Outlook (POC) 2019 to gather palm oil price views from expert speakers.
  • We deduced that the mean 2019 CPO price forecast of RM2,304 is lower than our forecast of RM2,400 due to concerns over weaker demand for CPO.
  • CPO price forecasts provided by speakers were in the range of RM1,950 to RM2,525/tonne.
  • Potential swing factors for CPO prices are weather, crude oil prices and government policies.
  • Maintain Neutral. Key picks are FIRST RESOURCES LIMITED (SGX:EB5), Genting Plantation and WILMAR INTERNATIONAL LIMITED (SGX:F34).

POC 2019 – 30th edition

  • We attended the 30th edition of the Annual Palm and Lauric Oils Conference and Exhibition Price Outlook (POC) 2019 at the Shangri-La, Kuala Lumpur, from 4 to 6 Mar 2019. This event is the most prominent, longest-running and among the largest annual events for the palm oil industry.
  • The conference features well-known experts from the edible oils and oilseeds industries, who provide insights into the price outlook for palm oil as well as related topics on the industry. This event is closely monitored by futures traders, planters, consumers of palm oil and investment professionals looking for pointers on the key drivers for the CPO price and industry developments. 
  • We gathered that this year's event drew 2,000 participants. Below we provide the key highlights on CPO price predictions made at the event.

CPO price outlook

Predicted CPO price ranges from RM1,950 to RM2,525

  • Ten speakers at the conference provided their views on the CPO price outlook for 2019. As usual, the price forecasts came in different forms and timeframes. Most provided an average price, while some provided the potential price at which the CPO price could reach or find support during the year, or quarterly prices in some cases.
  • We deduced that the ten speakers predicted the CPO price trading band for 2019 to range from RM1,950 to RM2,525 per tonne, based on an exchange rate of RM4.1/US$1.
  • Using the same methodology as in the past 13 years, we estimated the mean of the price forecasts to be around RM2,304 per tonne. This is 3.2% higher than the 2018 average CPO price of RM2,232.5 per tonne.
  • The speakers suggested a narrower trading band range for the CPO price of RM1,950 to RM2,525 per tonne this year against last year's actual trading band range of RM1,717 to RM2,555 per tonne. This could be due to the fact that most forecasters do not expect major surprises in palm oil supplies against market forecasts as Indonesia is unlikely to repeat a similar sharp jump in CPO production that it witnessed last year, which led to the sharp decline in CPO prices in 2018. YTD, the CPO price has ranged from RM1,902 to RM2,153 per tonne, and averaged RM2,057.5 per tonne in the first two months of 2019.

A recap of 2018 price forecasts and how they fared

  • Presenters at the 2018 POC gave a trading range of RM2,200 to RM2,730 per tonne for CPO price, and we worked out the mean to be RM2,478 per tonne.
  • The actual trading range for 2018 turned out to be RM1,717 to RM2,549 per tonne, while the average price achieved was RM2,232.5 per tonne (or 10% lower than the median price) as the speakers were too optimistic on demand and underestimated palm oil supply.
  • This is the first time since POC 2015 that the actual CPO price fell behind the average CPO price forecasts. Our record-keeping revealed that the actual price has exceeded the mean price forecasts provided at the conference in six out of the 13 years. We also observed that median price forecasts at POC tend (though not always) to fall behind actual prices achieved when CPO prices are on a downtrend and vice versa.

Summary of price views from presenters

  • Thomas Mielke from Oil World is of the view that palm oil price came under pressure in 2018 due to higher-than-expected supplies and declining imports, leading to an accumulation of stocks. In last year’s POC2018, he had projected global palm oil supply to increase by 2.97m to 70.84m tonnes in 2018. However, due to higher-than-expected palm oil supply from Indonesia, global palm oil output grew at a much higher rate of 4.2m tonnes in 2018.
  • In his paper, he revealed palm oil output projections of 20.1m tonnes for Malaysia for 2019 (vs. 19.5m tonnes in 2018) and 43m tonnes for Indonesia in 2019 (vs. 41.3m tonnes in 2018). Overall, he estimates global palm oil output to grow at a slower rate of 2.8m tonnes in 2019 to 75.3m tonnes. 
  • He predicted global palm oil consumption to increase by 6.2m-6.5m tonnes for Oct/Sep 2019, exceeding global palm oil supply. However, he expects the current high palm oil stocks to moderate the supply tightness.
  • He estimated that global biodiesel usage grew at a faster rate of 4.6m tonnes to 40.43m tonnes in 2018 (vs. 1.72m tonnes to 35.83m tonnes in 2017). For 2019F, global biodiesel production is expected to rise by 3.64m tonnes to 44.07m tonnes driven mainly by the higher biodiesel mandates in Indonesia (2019: +2.3m tonnes).
  • Approximately 15.1m tonnes of palm oil were converted into biodiesel/fuel for electricity in 2018 and represented 21.5% of total global palm oil usage. He predicted that the palm oil used for biodiesel purposes will increase by 3.2m tonnes to 18.3m tonnes in 2019, driven mainly by Indonesia’s biodiesel mandate.
  • In his paper, he predicted that global supplies of 17 major edible oils will increase by a slower rate of 5m tonnes in 2018/19F (vs. 11m tonnes in 2017/19) to 234.6m tonnes, which is lower than the forecasted growth in the consumption of edible oils of 8.8m tonnes to 234.3m tonnes. This will help to deplete current high global edible oil stocks.
  • He is of the view that the CPO price is currently undervalued and is likely to recover in the next 4-5 months to RM2,350 to RM2,450 per tonne. He thinks that the current upside in price is capped by the high palm oil stocks.
  • He pointed out that the key swing factors to watch are
    1. palm oil supplies figure;
    2. import figures for palm oil;
    3. development of US-China trade war;
    4. biodiesel usage by Indonesia;
    5. crude oil prices and
    6. weather development in the key palm oil regions.
  • He expects the annual increase in palm oil supplies to slow down to 2m tonnes per annum in 2019F-2025F and to 1.7m tonnes in 2025F-2030F (from an average annual growth of 3m tonnes per annum from 2005-2018 due to several challenges facing the palm oil industry such as:
    1. lack of replanting;
    2. labour shortages in Malaysia and
    3. slowdown in new plantings.
  • Dr. James Fry from LMC, an industry analyst, is of the view that the US EPA’s actions have cut soy oil prices, and this has capped CPO prices upside. He predicted that the production growth rate of palm oil will rise at a slower rate of 2.8m tonnes this year (vs. 5m tonnes in 2018). Demand, on the other hand, will likely be fairly strong, driven by higher biofuel demand for CPO in 2019 by at least 1.5m tonnes and higher palm oil demand by China (due to weak Chinese soy crushing activities).
  • He is of the view that crude oil price will trade in the range of near US$60/barrel for WTI and US$70/barrel for Brent. He calculated that at US$70/brent, the implied floor price for CPO would be US$480 fob South East Asia or RM1,950 per tonne at the current exchange rate. He believes that as long as Indonesia sticks to a B20 mandate and Malaysia implements the B10 mandate, world palm oil stocks should fall by 1m to 1.5m tonnes during 2019.
  • He expects the CPO price premium over Brent to rise from the current value of US$70/tonne (vs. long run average level of US$225 per tonne) when stocks decline.
  • Given the very high stock level currently, he does not expect the premium to regain its long run average, but expects the lower stocks to lift the premium by US$100 to US$170 by mid-year.
  • In view of this, and crude oil price of US$70/barrel for Brent, he estimates CPO price (SEA) fob to be at US$620 (RM2,525 per tonne). However, should Brent settle at US$65/barrel and US$60/barrel, the fob prices for CPO will be at US$580 (RM2,360) per tonne and RM550 (RM2,240) per tonne, respectively.
  • Arif P Rachmat, Founder and Executive Chairman from Triputra Agro Presada Group revealed that the high palm oil supplies in 2018 was because of the doubling of new planting of palm oil area between 2006 to 2013. These estates are currently in their prime age. He also revealed that statistics for the past 10 years revealed that the lowest CPO price occurred most in the months of Sep and Oct.
  • He cited that one of the key reasons behind the success in implementing the B20 mandate on the non-PSO sector has been the enforcement of the Rp6,000 litres penalty for non-compliance of the biodiesel mandate in Indonesia. The challenges faced in implementing the B20 has been logistics issues, which the industry is working to resolve. He expects Indonesia to consume 6.2m kls of biodiesel in 2019. Out of which, 3.4m kls is for the PSO (transport sector) and the remaining 2.8m kls for the non-PSO sector.
  • He is of the view that the government’s decision to maintain the zero export levy in 2019 will not affect the implementation of B20. He estimates that the subsidies needed are US$1.28bn (assuming price spread of Rp3,000 per litre between the biodiesel price in Indonesia and diesel fuel index and 6.2m kls biodiesel), which is lower than the CPO funds size of US$1.44bn. On top of this, the average price spread between the biodiesel price in Indonesia and diesel fuel index is only Rp786/litres.
  • On price forecasts, he is of the view that prices may have bottomed in 2018 and are likely to average US$550-600 per tonne in 2019 (RM2,255 to RM2,460 per tonne). His price forecasts are based on his prediction that global CPO demand is likely to exceed supply by 2m tonnes.

Valuation and Recommendation

How do these projections compare with our forecast?

  • The mean price forecast provided during the conference of RM2,304 per tonne is lower than our average CPO price forecast of RM2,400 per tonne for 2019. We concur with the speakers’ views of slowing global palm oil supply and improving biodiesel demand. We are currently more optimistic on CPO prices than the speakers as we are more bullish on demand prospects due to the attractive price of CPO relative to its substitutes.
  • We maintain our view that for CPO prices to move up meaningfully, CPO stocks in Malaysia will have to be pared down to 2.5m tonnes and below.

Maintain a NEUTRAL call on the sector

  • The speakers’ views that CPO futures prices could rise by 19% to an average of RM2,304 per tonne from the current price level of RM1,934 per tonne will be positive news for CPO producers. However, we do not expect this to lead to a significant re-rating in the share prices of plantation companies as the price forecasts are broadly in line with market expectations. As such, we maintain our NEUTRAL call on regional planters and recommend that investors be selective in picking stocks in the sector.
  • Our top picks are FIRST RESOURCES LIMITED (SGX:EB5) (attractive age profile of estates), WILMAR INTERNATIONAL LIMITED (SGX:F34) (plan to list Wilmar China and improve downstream profit) and Genting Plantations (strong output growth prospects due to its young estates).

Ivy NG Lee Fang CFA CGS-CIMB Research | 2019-03-07
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