Regional Plantations - UOB Kay Hian 2022-11-07: Firm CPO Prices To Continue Into 1Q23

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Regional Plantations - Firm CPO Prices To Continue Into 1Q23

• The CPO price outlook given by the speakers during IPOC is in line with our expectations − CPO prices should remain supported in the near term with lower-than-expected production from Indonesia and Malaysia, and strong demand from China and India. However, CPO prices would be lower y-o-y as:
  1. total vegoil production would be better y-o-y (especially soybean, sunflower and rapeseed) in 2023, and
  2. demand from China and India would be lower after stocking up in 4Q22.
• Maintain MARKET WEIGHT.

What's new

• During the recent Indonesia Palm Oil Conference (IPOC), we note that the speakers’ view and price forecasts are in line with ours, where we expect CPO prices to remain supported (at least until 4Q22) and then decline y-o-y in 2023. Industry veterans expect CPO prices to trade between RM3,500-4,500/tonne in the near term, and then trade lower y-o-y for 2023.
• CPO prices will remain supported in the near term, mainly buoyed by:
  1. Lower-than-expected production from Indonesia and Malaysia. Most of the speakers have revised down their palm oil production forecasts for 2022 (especially for Indonesia from 3.0m tonnes to 1.5-2.0m tonnes, due to the crop losses during the export ban period).
  2. Demand recovery on reasonable palm oil prices. As CPO prices have normalised, India has been aggressively buying, reaching a historical high palm oil inventory level in Oct 22. Market also expects China to reach a historical high import in Oct/Nov 22, thanks to the attractive CPO prices.
• However, CPO prices should be lower y-o-y in 2023, due to:
  1. Strong recovery in total vegoil production in 2023. Thomas Mielke from Oil World expects total vegetable oil growth to hit +3.5% y-o-y for 2023 due to growth in soybean oil and rapeseed oil. Hence, total vegoil inventory in 2023 should reach the highest in five years at 30.8m tonnes (2022: 29.7m tonnes). Thomas believes the high inventory level has only been factored into CPO prices, but not soybean oil, sunflower oil and rapeseed oil prices. This may slightly weigh on CPO prices.
  2. Ample soybean and oilseed supply. With higher soybean planting areas and La Nina expected to end in early-Jan 23 (which would allow Argentina’s soybean to experience normal weather), market analysts expect soybean to see a stronger y-o-y production growth in 2023.
  3. Sluggish demand from China and India, at least up to 1Q23. With the historical high palm oil inventory in both of these countries, market expects some slowdown in the import of palm oil to allow domestic market consumption.
• Based on our channel checks during IPOC, we gathered the following:
  1. Lower fertiliser application. Fertiliser application for most Indonesia plantation companies may only reach 80% of their full-year targets, given the unfavourable weather.
  2. Indonesia’s palm oil production may slow down in 4Q22, especially in Central Kalimantan and West Kalimantan, due to the recent heavy rainfall which had affected the harvesting and evacuation process.
  3. Sluggish sales, mainly due to lower grade palm oil. The heavy rainfall has led to higher free fatty acid in CPO and affected the quality of CPO; hence there is some slowdown in sales.

No change to CPO ASP assumptions.

• We maintain our CPO price assumptions at RM5,200/tonne and RM4,000/tonne for 2022 and 2023 respectively.

Sector Catalysts

• Factors that investors should monitor include the following:
  1. Black Sea War. A continuation of the Black Sea War continues would be supportive for vegoil prices. However, assuming that the Black Sea War ends, the market will then be flooded by huge vegoil supply.
  2. Higher biodiesel and renewable diesel demand. Indonesia is highly likely to increase its biodiesel mandate from B30 to B40 in 2023. This would translate another additional 4.0m kl (3.5m tonnes) of palm oil needed. On top of that, market expects higher biofuel demand from the US, Europe and Brazil region, where their biodiesel feedstock are mainly from soybean oil and rapseed oil. The US may hit its record-high biodiesel and renewable diesel production level in 2022, exceeding 10m tonnes, with 2023 levels potentially being higher than 2022’s as well.
  3. Higher demand for soybean oil on higher renewable diesel usage for the production of sustainable aviation fuel.

Sector Risks

• Higher demand from biodiesel and renewable diesel may lead to higher-than-expected vegoil consumption and mitigate the recession risk concern.

Leow Huey Chuen UOB Kay Hian Research | Jacquelyn Yow UOB Kay Hian | https://research.uobkayhian.com/ 2022-11-07

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