Agribusiness - CGS-CIMB Research 2019-04-08: What If Palm Oil Is Part Of The East Coast Rail Link (ECRL) Deal?

Agribusiness - CGS-CIMB Research | SGinvestors.io WILMAR INTERNATIONAL LIMITED (SGX:F34) FIRST RESOURCES LIMITED (SGX:EB5)

Agribusiness - What If Palm Oil Is Part Of The East Coast Rail Link (ECRL) Deal?

  • The East Coast Rail Link (ECRL) deal could potentially include palm oil purchases from Malaysia.
  • If so, this could boost Chinese demand for palm oil from Malaysia.
  • We view this as potentially positive for the sector and trade surplus.



ECRL deal with China to include palm oil purchase?

  • According to a report by The Star quoting unnamed sources, the current renegotiation on the East Coast Rail Link (ECRL) could see its construction price pegged at RM50m to RM60m per km, as well as a commitment by the Chinese government to buy Malaysian palm oil and bring in projects. The report does not say how much palm oil China will be committed to buy, nor the duration of the potential commitment.
  • Our construction analyst has estimated that the cost for ECRL could be slashed by 48% to RM35bn from RM67bn.


Background on the China edible oils market

  • China is the world’s largest consumer and third-largest importer of edible oils. According to MPOB, China consumed 37.4m tonnes of edible oils in 2017. Of this, China imports around 8.74m tonnes (23.4%) of its total requirements. Palm oil makes up around 5.05m tonnes or 58% of China’s edible oil imports.
  • Malaysia’s share of China’s total palm oil imports is around 1.92m tonnes or 5% of China’s total edible oil consumption.


Impact on CPO prices depends on volume committed

  • We are positive on this news as it could allow Malaysia to potentially lock in higher palm oil export volumes to China over the next few years. We are of the view that if the deal involves higher palm oil sales volumes from Malaysia to China compared to 2018’s 1.87m tonnes, it would help boost Malaysia’s CPO price via the drawdown of stocks.
  • If the commitments involve China using more palm oil at the expense of other edible oils, it would be overall positive for CPO prices due to higher global demand for palm oil. However, if the deal results in China maintaining its palm oil usage but increasing its share of palm oil purchases from Malaysia, it could potentially help widen the CPO price premium gap between Malaysia and Indonesian CPO prices.


Potential impact on trade surplus and planters

  • In the event the ECRL talks lead to higher CPO price, it will be positive for upstream planters and Malaysia’s current account surplus. The higher CPO prices would help boost plantation earnings and/or defray costs from higher minimum wage. Our economist estimates that every 5% increase in palm oil export volumes, assuming palm oil prices remain constant, could raise Malaysia’s current account surplus by RM2bn or 0.14% of GDP.
  • We are keeping our 2019 average CPO price forecast of RM2,400 per tonne intact and Neutral rating on sector.
  • Regional picks are WILMAR INTERNATIONAL LIMITED (SGX:F34), FIRST RESOURCES LIMITED (SGX:EB5) and Genting Plantations.





Ivy NG Lee Fang CFA CGS-CIMB Research | https://research.itradecimb.com/ 2019-04-08
SGX Stock Analyst Report ADD MAINTAIN ADD 3.960 SAME 3.960
ADD MAINTAIN ADD 2.120 SAME 2.120



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