Plantation – Singapore - UOB Kay Hian 2019-05-17: Still Positive On CPO Prices

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

Plantation – Singapore - Still Positive On CPO Prices

  • Both speakers remain positive on CPO prices which are likely to trade at US$530- 550/tonne, and are highly dependent on government policies.
  • B30 biodiesel implementation in Indonesia is unlikely to come before Jan 20. India would have higher palm oil demand in 2019. Palm oil imports for China might also increase with the severe African swine flu and the on-going US-China trade war.
  • Maintain MARKET WEIGHT.



WHAT’S NEW

  • We hosted a Palm Oil and Outlook Seminar yesterday in Singapore. Mr Togar Sitanggang from GAPKI and Mr Dorab E. Mistry from Godrej International shared on the biodiesel programme in Indonesia and the outlook for palm and vegetable oils. Both speakers remained postive of the recovery in CPO prices from the low of US$470 to US$530- 550/tonne.

Palm supply and demand relatively balanced in 2019.

  • However, demand may increase from Indonesia’s biodiesel mandate, India and China. CPO prices are highly dependent on government policies and stock levels of all vegetable oils.
  • Key takeaways from the seminar:
    • B30 implementation is unlikely to come earlier than Jan 20.
    • Biodiesel producers in Indonesia are operating at full capacity.
    • Additional 500,000 tonnes of vegetable oils demand from India, mainly palm oil.
    • Shift of market share of India imports of refined products from Indonesia to Malaysia.
    • World’s palm oil production may rise by 3m tonnes in 2019.
    • Expect palm oil lower production from Malaysia in 2H19.
    • China would still import less rapeseed oil.
    • Lower production of rapeseed and soybean globally.
    • Ample supply of soybeans globally.


ESSENTIALS


B30 road test.

  • Six car manufactures will participate in the B30 road test which will kick off next week. It would take three months for the road test to complete and the implementation of B30 may only start in Jan 20 if there is no disagreement from related parties.

Biodiesel to operate at full utilisation rate.

  • If the B30 implementation kicks off, Indonesia might not be able to export biodiesel with the huge local demand. Mr Togar raised his forecast for Indonesia’s biodiesel consumption to 7m tonnes from 6m tonnes at his previous presentation at our event in Mar 19 in Kuala Lumpur. The upward revision was due mainly to higher consumption from non-mandated segments in Indonesia.

Additional 500,000 tonnes of vegetable oils demand from India.

  • Low vegetable oil prices have encouraged demand of vegetable oils in India. Mr Dorab highlighted there might be an additional 500,000 tonnes of vegetable oils imports for 2019, mainly palm oil, due to the huge discount between soybean oil and palm oil prices.

Lower growth in global palm oil production.

  • Global palm oil production may rise by 3m tonnes (2018: +5m tonnes) as older trees suffer from stress due to their high productivity in 2018. This might be further impacted by lower fertiliser usage among smallholders who have seen low prices since Aug 18.

Higher palm oil demand from China.

  • Soybean demand from China could stay low amid the African swine flu and the prolonged US-China trade war. China might also import lesser rapeseed oil due to lower global rapeseed production in 2019. This might be an opportunity to further boost palm oil imports in China.


SECTOR CATALYSTS


El Nino.

  • The National Oceanic and Atmospheric Administration (NOAA) recently forecasted that chances of an El Nino development now stand at 70%. Should an El Nino occur, palm oil production should be affected starting 2H19.

Higher-than-expected biodiesel usage.

  • 2019 should see higher biodiesel usage, supported by the expanded biodiesel mandates in Indonesia and Malaysia. The Indonesian government may increase the biodiesel mandate to B30 blending (from B20) in early-20.
  • Some Indonesian stakeholders from private and state institutions will kick off a maiden road test for B30 biodiesel usage in their vehicles end-May. If the mandate increases to B30 in Indonesia, blending volume is likely to increase by an additional 3m kl per year (2019F: 6.2m kl). Based on Indonesia Biofuels Producer Association (APROBI) data, Jan-Feb 19 domestic biodiesel usage was 1.38m kl and exports were about 1.04m kl.


ASSUMPTION CHANGES

  • No change to our CPO price assumptions of RM2,350/tonne for 2019 and RM2,400/tonne for 2020. We foresee 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 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 | https://research.uobkayhian.com/ 2019-05-17
SGX Stock Analyst Report BUY MAINTAIN BUY 3.900 SAME 3.900
BUY MAINTAIN BUY 0.810 SAME 0.810
HOLD MAINTAIN HOLD 1.70 SAME 1.70
SELL MAINTAIN SELL 0.210 SAME 0.210



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