Plantation - UOB Kay Hian 2019-03-05: Positive CPO Price Outlook For 2019

Plantation - UOB Kay Hian Research | SGinvestors.io WILMAR INTERNATIONAL LIMITED (SGX:F34) FIRST RESOURCES LIMITED (SGX:EB5) BUMITAMA AGRI LTD. (SGX:P8Z) GOLDEN AGRI-RESOURCES LTD (SGX:E5H)

Plantation - Positive CPO Price Outlook For 2019

  • All speakers share our view that CPO prices are likely to trend at RM2,200-2,400/tonne in 2019. CPO production in Malaysia and Indonesia is expected to increase by 2.5m- 3.0m tonnes y-o-y in 2019. However, production growth is expected to be slow in 2019 with more old-age trees and less replanting.
  • If production growth comes in lower y-o-y with strong biodiesel demand from the EU, Indonesia and Malaysia, we expect a better CPO price outlook for 2019. Maintain MARKET WEIGHT.



WHAT’S NEW

  • During a recent Palm Oil and Ringgit Outlook Seminar 2019, four speakers shared more about the ringgit’s outlook and the palm oil market’s outlook in Malaysia, India and Indonesia.

Key takeaways from the seminar:

  • Positive on ringgit outlook in 2019, provided that there are no further hikes from the Federal Reserve.
  • CPO production in Malaysia and Indonesia to increase by 2.5m-3.0m tonnes y-o-y in 2019.
  • Slower production growth in 2019 for both Malaysia and Indonesia. However, production in 1Q19 might still come in higher y-o-y.
  • Strong demand for biodiesel in 2019, mainly driven by Indonesia and Malaysia with the current biodiesel blending mandate. Demand would further strengthen if the Indonesian government increases the B20 biodiesel blending mandate to B30.
  • Growth of world consumption of oils and fats might outpace production growth.
  • Stronger Brent crude oil prices could be key factor that might boost biodiesel production.
  • To conclude, CPO prices in 2019 are expected to recover slowly with lower output growth l demand. Demand may continue to increase on higher consumption from developing countries.


ACTION


Maintain MARKET WEIGHT.

  • We maintain our view that CPO prices in 2019 will have a positive outlook on lower production and strong demand for biodiesel. Our average CPO price assumption for 2019 is aligned with speakers’ assumption at RM2,350.


ESSENTIALS - Key factors that would affect CPO prices in the short to medium term:


Production growth to be slow in Malaysia.

  • Production growth is expected to be lower for 2019. According to Oil World, the slower production growth will be underpinned by:
    1. 20% of oil palm trees in Malaysia are over 20 years old;
    2. lack of replanting, and
    3. cut backs on fertilizer application.

Impact from US-China trade war.

  • China has been raising imports of palm oil and soy oil to compensate for smaller domestic production which has led to lower soybean crushing. The growth trend of Chinese soybean import might be interrupted in 2019 with lower demand; Oil World forecasts lower China soybean imports at 87.5m tonnes for 2018-19F. This might further boost palm oil imports to China.

Increase in EU’s usage of palm oil.

  • In 2017-18, about 16% of the world’s consumption of the 17 oils and fats was meant for energy generation/purposes. Biofuel usage had increased 2.3m tonnes in 2017/18 from the previous year. The sharp increase of 2.5m tonnes in the EU’s biodiesel net imports in 2018 was mainly due to rising biodiesel consumption.
  • It is expected that the EU will continue to increase their usage of renewable energy and biodiesel consumption, which contributed about 62% of their total palm oil usage.

Strong biodiesel demand.

  • According to Oil World, biodiesel production will remain high in 2019 (Jan-Jun 19). The main drivers of biodiesel production growth will come from Indonesia and Malaysia with about about 18.3m tonnes of palm oil to be used in 2019. However, growth might slow down from 2020 onwards.
  • It was also highlighted by Indonesian Palm Oil Association (GAPKI) that the full year implementation of B20 biodiesel blending in Indonesia will continue to raise biodiesel consumption. We understand that there might be an addendum for additional allocation on biodiesel blending in Oct/Nov 19 with extra biodiesel demand expected for electricity purposes and both the PSO and non-PSO segments.
  • Speakers also shared that they are positive on the sector and looking forward to the expanded biodiesel mandate in Indonesia.

World consumption growth might outpace production growth.

  • With the slowdown in production for palm oil, soybean oil and rapeseed oil, Oil World forecasts that world consumption might outpace production growth with the continuing increase in consumption demand.
  • According to Mr Sudhakar, CEO of Emami Agrotech, Indian edible oil production is expected to increase by 12% and yet consumption might rise by 27% for 2018-19 with consumption per capita at 17.21kg (previous: 14.28kg).

India’s import duty.

  • Palm oil imports from India will continue to increase with the implementation of a lower India import duty at 44% for CPO and 49.5% for RBD Olein.
  • India has cut the import duty on crude palm oil from some countries, including top growers in Indonesia and Malaysia, to 40% from 44%, effective 1 Jan 19. This will further benefit Malaysia with the import duty on other palm oils from Malaysia reduced to 45% from 54%.


Negative factors that could lead to weaker CPO prices:


Increase in sunflower seed and soybean production.

  • Global planted area for soybean increased significantly over the past 20 years as compared to oil palm. With the advancement in technology and less dependence on labour, soybean production is expected to increase in 2019.
  • Sunflower seeds’ yield had increased 53% in the past 15 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 are expecting CPO prices to recover gradually with higher prices in 2H19 as inventories are drawn down on lower production growth expected for 2019.


RISKS

  • Higher-than-expected production.
  • Weakening crude oil prices. Biofuel demand is 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 of importing countries. Key markets to monitor would be Europe (on 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/ 2019-03-05
SGX Stock Analyst Report BUY MAINTAIN BUY 3.900 SAME 3.900
HOLD MAINTAIN HOLD 1.850 SAME 1.850
BUY MAINTAIN BUY 0.810 SAME 0.810
SELL MAINTAIN SELL 0.210 SAME 0.210



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