Regional Plantations - Maybank Kim Eng 2021-01-11: 2021 Expect Another Volatile Year & A Year Of Two Halves

Regional Plantations - Maybank Kim Eng  SGinvestors.io FIRST RESOURCES LIMITED (SGX:EB5) BUMITAMA AGRI LTD. (SGX:P8Z)

Regional Plantations - 2021: Expect Another Volatile Year & A Year Of Two Halves

Tight global supply a boon for 1Q21

  • Under-investments in recent years and biological tree stress led to palm oil supply shock in 2020. As global 10 oilseeds were also tight in supply, this led to the sharp increase in CPO spot price in 2H20 to end the year at MYR3,788/t (+25% y-o-y). The short term tightness in global supplies and uncertainties of the La Nina impact on South American crop will continue to keep CPO price lofty at least in 1Q21.
  • Ongoing weather concerns presents upside risk to our MYR2,500/t CPO ASP forecasts for 2021.
  • Maintain POSITIVE call on the sector as small-mid cap stock prices have lagged CPO price rally. Preferred BUYs: First Resources (SGX:EB5), Kuala Lumpur Kepong, Sarawak Oil Palms and Boustead Plantations.

2020: Global supply shock, led by palm oil

  • The severity of biological tree stress in 2020 was under-estimated by growers, especially in Indonesia. Below-expected output, particularly in 2H20, led to a shortage of palm oil. Unfavourable weather also affected the production of other key vegetable oils and oilseeds which led to an unprecedented decline in global 17 oils and fats in 2019/20F output for the first time in history.
  • On the demand side, there was pent-up demand post COVID-19 lockdown especially from China (on stocking building) and India. The other factors that have also contributed to the sharp rise in CPO price were Indonesia’s revamp of its export tax structure in December 2020 to sustain its B30 mandate, global low interest rates, and a weak US Dollar.

Tight supply to stay till mid-2021, sustaining price

  • Since June 2020, the unfavourable weather development and worse-than-expected palm oil output have led to several successive downward revisions in global vegetable oils output estimates by Oil World. The earlier anticipated moderate supply scenario for palm oil has turned tight in recent months.
  • In its latest Dec 2020 issue, Oil World again revised down its Oct/Sept 2020/21F marketing years stock-to-usage ratio (SUR) projections for palm oil and 17 oils and fats to 16.5%/13.2% (June 2020’s projections: 18.4%/13.6%) respectively. Even the global 10 oilseeds’ SUR was projected to be tighter.

Upside risk to our MYR2,500/t CPO ASP for 2021

  • We anticipate 2021 to be a year of production recovery for palm oil (+4.8mt; 2020E: -2.7mt) due to recent good rainfall brought about by La Nina and a normalization of fertiliser application invigorated by better CPO prices. But most of the recovery will be more apparent in 2H21 on seasonality factor. Hence, 2021 CPO price will likely start the year on a high note as low brought forward stockpile coupled with low production period in 1Q21 require CPO prices to stay lofty to ration demand.
  • But as seasonally higher 2H21 output becomes more apparent by mid-year, CPO price will come off by then as the present price parity between CPO and US soybean oil (its key competing vegetable oils) is not sustainable.
  • Nonetheless, the present risk to our 2021 CPO ASP forecast of MYR2,500/t is on the upside. Our forecast has yet to factor in
    1. any significant crop failure in the ongoing South American soybean planting season,
    2. crude oil price staging a massive rally, and
    3. 2021’s palm oil output coming in below-expectations.

Ong Chee Ting CA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2021-01-11
SGX Stock Analyst Report BUY MAINTAIN BUY 1.960 SAME 1.960