FIRST RESOURCES LIMITED (SGX:EB5)
BUMITAMA AGRI LTD. (SGX:P8Z)
Regional Plantations - Not So Rosy Outlook In 2H20
Expert worries about post lockdown demand
- We hosted a conference call with Dato’ Yeo How, an industry veteran which was well participated by over 100 people. In summary, he opines palm oil price rebound is likely in May/June but palm oil price will turn bearish again in 2H20 on higher output and still weak energy demand.
- Our 12M NEUTRAL sector view is unchanged but values can be found among the small-mid caps, which trade at or near GFC trough PBV (see report: Regional Plantations - Maybank Kim Eng 2020-04-13: Seasonally Higher March Stockpile).
- Our preferred BUYs are KLK, First Resources (SGX:EB5), Bumitama Agri (SGX:P8Z), SOP. SELL GENP.
Key takeaways from the conference call
- Key takeaways:
- Dato’ forecasts global y-o-y drop in palm oil demand to be between 6-9mt in 2020, mainly from India (-1.5m to -2.0mt), China (- 1.5m to -2.0mt) and EU (–1.0mt). The biggest drop in demand will come from the energy sector;
- Malaysia’s (MY) palm oil price is presently at a USD15-20/t discount to Indonesia’s palm oil price, a rare occurrence as MY’s palm oil price is usually at a premium;
- Yields in MY’s estates have picked up last two months but Indonesia lags;
- Indonesia’s palm oil tanks are not overflowing as reported in the media recently;
- Indonesia’s B30 mandate is still in full steam YTD but he expects its CPO Fund to run dry by end-July if current POGO (palm oil-gas oil) spread remains wide. Indonesia needs to devise new measures to ensure that Indonesia’s biodiesel mandate stays its course and use up at least 5mt in 2020. Else, palm oil price risks gravitating towards production cost if the mandate is abandoned in 2H20;
- EU’s food related demand will normalise post COVID-19 but the recovery may take longer for the energy segment;
- There is no supply disruption in Indonesia due to COVID-19 as workers and logistics are not affected;
- The combined Malaysia-Indonesia palm oil output for 2020 will be relatively flattish y-o-y;
- Sustained low palm oil prices will affect fertilizer application (especially for smallholders) and supply growth will be constrained in 2021;
- Low crude oil price will invariably result in lower cost of production as transportation, chemicals and fertilizer costs become cheaper; and
- Affordability is an issue in certain key markets such India with its weakened currency, credit crunch and slowing economy. But palm oil should benefit as long as it is priced competitively vis-à-vis other vegetable oils.
CPO price to break below MYR2,000/t in 2H20?
- Dato’ believes there will be a short term price relief for CPO (ie price rebound) in May-June as countries reopen after lockdown to re-stock. However, he is not sure if the pent up demand will be sustainable. And as palm oil output picks up strongly in 2H20, inventory levels may build-up quickly. For Malaysia, he forecasts inventory level will likely exceed 3mt by end-2020.
- Dato’ forecasts CPO BMD price to be under pressure in 2H20 (assuming crude oil price does not recover significantly), dropping towards USD400-450/t levels (or MYR1,740-1,959/t) by year end. In an unlikely worst case scenario, CPO price may break below USD400/t (ie. the estimated cash cost level of less efficient producers) if Indonesia completely abandons its B30 mandate.
- MKE’s view: We concur with Dato’s view on weaker CPO price outlook in 2H20 on seasonally higher output but the extent of drop is debatable. We are keeping our 2020 CPO ASP forecast of MYR2,300/t (YTD spot price: MYR2,583/t).
Ong Chee Ting CA
Maybank Kim Eng Research
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https://www.maybank-ke.com.sg/
2020-04-30
SGX Stock
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