Plantation – Regional - UOB Kay Hian 2019-03-07: Strong Demand For Biodiesel; Positive Outlook For CPO Prices

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Plantation – Regional - Strong Demand For Biodiesel; Positive Outlook For CPO Prices

• All speakers share their view that CPO prices are likely to trend at RM2,200-2,400/ tonne in 2019. CPO production in Malaysia and Indonesia for 2019 is expected to increase by 2.5m-3.0m tonnes y-o-y, whereby in Indonesia, biodiesel demand is expected to increase by 2m tonnes to 5.12m tonnes in 2019. The gradual price recovery would be supported by lower production, strong biodiesel demand and lower soybean meal demand.
• We have a positive outlook for CPO prices in 2019. Maintain MARKET WEIGHT.

WHAT’S NEW

• Key takeaways from the Palm & Lauric Oils Price Outlook Conference (POC) 2019
  1. Slower production growth is expected at 3-4% for Indonesia and 4-5% for Malaysia. However, production growth will remain high y-o-y in the early of the year.
  2. Combined output of Indonesia and Malaysia will increase by 2.5m-3m tonnes in 2019 (2018:5m tonnes).
  3. Palm oil demand will continue to grow on higher export growth to Pakistan, Bangladesh, India and China.
  4. Indonesia and Malaysia plan to increase their biodiesel mandates.
  5. Indonesia palm-based biodiesel consumption will increase to 5.12m tonnes (6.2m kl) with the full implementation of B20 for both PSO and non-PSO segments.
  6. Asia will dominate in terms of biodiesel for road transport in the coming years. Any drop in biodiesel demand may affect CPO prices significantly.
  7. Mild to moderate El-Nino in 2019, which would have very limited crop impact from slightly drier conditions.
  8. Lower canola and rapeseed production in 2019 and lower soybean meal demand from China. This might benefit palm oil.

ACTION

Maintain MARKET WEIGHT.

• We maintain our view that CPO prices in 2019 will have a positive outlook on the back of:
  1. lower production;
  2. strong demand for biodiesel;
  3. lower soybean crushing; and
  4. lower rapeseed and canola production.
• Our average CPO price assumption of RM2,350 for 2019 is aligned with the speakers’ forecasts of RM2,200- 2,400/tonne.

ESSENTIALS

Key factors that will affect CPO prices in the short to medium term:

• Slow production growth in 2019. According to Harald, director of UIE, global production growth is expected to slow down in 2019 with Indonesia’s production at 43.3m tonnes (2018: 41.9m tonnes) and Malaysia’s production at 20.4m tonnes (2018:19.6m tonnes). A mild to moderate El Nino is forecasted, which has limited impact on palm oil output. However, production in the early of the year might remain high y-o-y.
• Vegetable oils to continue to dominate as main feedstock as biodiesel. Market share of palm oil-based biodiesel increased 7ppt in 2018 at 37%, while soybean oil-based biodiesel’s market share slipped to 26.2% from 26.4%.
• Biodiesel demand to increase. With the full implementation of B20 for both the PSO and non-PSO segments in Indonesia, biodiesel consumption in Indonesia is expected at 5.12m tonnes in 2019, up almost 60% y-o-y (2018: 3.2m tonnes). Biodiesel consumption might increase by another 2.48m tonnes, if the Indonesia government increases the biodiesel mandate of B20 to B30. Total consumption might further increase on stronger demand for electricity. Most of the speakers were very positive and looked forward to the expanded biodiesel mandate in Indonesia to be implemented in late-19 or early-20. Malaysia’s biodiesel production would be at 1.2m-1.3m tonnes in 2019 (2018: 1.09m tonnes) with higher mandates of B10 in the transport sector and B7 in the industrial sector.
• Biodiesel fund is sufficient to support zero export levy. On 28 Feb 19, the Indonesia government had announced US$0 CPO export levy for Mar 19. With US$1.44b in the biodiesel fund as of 2018, the fund is still sufficient to support biodiesel volume of 6.2m kl in 2019, according to Mr Arif, founder and executive chairman of Triputra Agro Persada Group.
• Drawdown in inventory. Palm oil inventory is expected to be lower due to an oversupply in 2018 on the back of:
  1. lower production growth;
  2. higher biodiesel consumption in Indonesia and Malaysia; and
  3. lower soybean demand.
• Mr James Fry estimates global palm oil inventory might fall by 1m-1.5m tonnes in 2019, assuming the biodiesel mandates for Malaysia and Indonesia remain at status quo.
• Higher palm oil demand. With the recent African swine fever in China, soybean demand had dropped significant by 5-10%. Rapeseed and canola production would be lower in 2019. Hence, palm oil demand might rise to satisfy global oil demand on the back of population growth and increase in consumption per capita.

Key focus in the next decade:

Slower replanting programmes in Malaysia and Indonesia.

• We understand that FFB production growth could slow down in the next few years as there are not much new mature areas due to a slowdown in new planting and an ageing tree age profile. The average replanting for Malaysia was about 90,000ha per year.
• The age structure of the oil palms in Malaysia is another factor to look into, where about 20% of oil palms in Malaysia are 20 years or older.
• The cutback in fertilizer application in 2018 was due to high cost and this might also affect FFB production in the coming years.

ASSUMPTION CHANGES

• No change to our CPO price assumptions of RM2,350/tonne for 2019 and RM2,400/tonne for 2020. For 2019, we see higher CPO prices in 2H19 as inventories are drawn down on lower production growth expected for 2019.

RISKS

• Higher-than-expected CPO production.
• Weakening crude oil prices. Biofuel demand is currently close to 30% of global palm oil consumption. Thus, weakening crude oil prices could put this demand at risk.
• Changes in government policies, especially those from importing countries. Key markets be Europe (biofuel policy), India (import duty and base prices) and Indonesia (biodiesel mandate).

Leow Huay Chuen UOB Kay Hian Research | Malaysia Research Team UOB Kay Hian | https://research.uobkayhian.com/ 2019-03-07

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