Plantations - Demand is the key factor in 2Q15
Recommendation: Neutral
Malaysian palm oil inventories fell 12% mom to a 6-month low of 1.77m tonnes as at end-Jan 15. We view this as a neutral event as it is in line with our and consensus estimates. We expect palm oil output to trend higher from March onwards as the impact of flooding subsides. As such, higher CPO demand will be critical to keep inventory manageable. The recent proposal by the Indonesian government to provide Rp4k per litre subsidy for biodiesel in Indonesia and a more competitive CPO price discount to soybean oil will be the key factors to lift demand. Our Neutral sector stance and top picks – First Resources, AALI and SIMP – are intact.
What Happened
Palm oil stocks in Malaysia fell 12% mom to 1.77m tonnes as at end-Jan, which is in line with our and consensus estimates. FFB production fell 15% mom and 23% yoy as FFB yields achieved by the estates declined due to the impact of flooding in parts of Malaysia. Palm oil exports remain weak due partly to weaker biodiesel demand and narrower CPO price discount vs. soyoil.
What We Think
We expect the lower palm oil inventory and Indonesia’s recent proposal to provide biodiesel subsidy of Rp4,000 per litre to be supportive of near-term prices. However, Malaysia palm oil output is expected to trend higher from March onwards due to improved weather conditions and seasonal factors. As such, palm oil demand will need to pick up in the coming months to keep palm oil stocks manageable. We think that Indonesia’s proposed move to boost its local biodiesel consumption through subsidies and a new biodiesel pricing formula, will help to shore up demand for CPO in 2Q. This, coupled with better crude oil prices and more competitive CPO price discount vs. soybean oil, will be the key factors in boosting CPO demand. The key CPO price risk lies in the currently low crude oil prices, which will have a lagged negative impact on CPO demand. At the current Brent crude oil price of US$57 per barrel, we estimate a CPO biodiesel breakeven price of RM1,417 per tonne (without subsidy) and RM2,419 (with Indonesia's subsidy) vs. current the CPO price of RM2,317. For Feb 2015, we project that palm oil stocks will fall 2% mom to 1.74m tonnes.
What You Should Do
We maintain our average CPO price forecast of RM2,460 per tonne for 2015 and advise investors to be selective in their stock picks. Under our coverage, we favour First Resources, AALI and SIMP.
Source: CIMB Daybreak - 11 February 2015
Recommendation: Neutral
Malaysian palm oil inventories fell 12% mom to a 6-month low of 1.77m tonnes as at end-Jan 15. We view this as a neutral event as it is in line with our and consensus estimates. We expect palm oil output to trend higher from March onwards as the impact of flooding subsides. As such, higher CPO demand will be critical to keep inventory manageable. The recent proposal by the Indonesian government to provide Rp4k per litre subsidy for biodiesel in Indonesia and a more competitive CPO price discount to soybean oil will be the key factors to lift demand. Our Neutral sector stance and top picks – First Resources, AALI and SIMP – are intact.
What Happened
Palm oil stocks in Malaysia fell 12% mom to 1.77m tonnes as at end-Jan, which is in line with our and consensus estimates. FFB production fell 15% mom and 23% yoy as FFB yields achieved by the estates declined due to the impact of flooding in parts of Malaysia. Palm oil exports remain weak due partly to weaker biodiesel demand and narrower CPO price discount vs. soyoil.
What We Think
We expect the lower palm oil inventory and Indonesia’s recent proposal to provide biodiesel subsidy of Rp4,000 per litre to be supportive of near-term prices. However, Malaysia palm oil output is expected to trend higher from March onwards due to improved weather conditions and seasonal factors. As such, palm oil demand will need to pick up in the coming months to keep palm oil stocks manageable. We think that Indonesia’s proposed move to boost its local biodiesel consumption through subsidies and a new biodiesel pricing formula, will help to shore up demand for CPO in 2Q. This, coupled with better crude oil prices and more competitive CPO price discount vs. soybean oil, will be the key factors in boosting CPO demand. The key CPO price risk lies in the currently low crude oil prices, which will have a lagged negative impact on CPO demand. At the current Brent crude oil price of US$57 per barrel, we estimate a CPO biodiesel breakeven price of RM1,417 per tonne (without subsidy) and RM2,419 (with Indonesia's subsidy) vs. current the CPO price of RM2,317. For Feb 2015, we project that palm oil stocks will fall 2% mom to 1.74m tonnes.
What You Should Do
We maintain our average CPO price forecast of RM2,460 per tonne for 2015 and advise investors to be selective in their stock picks. Under our coverage, we favour First Resources, AALI and SIMP.
Source: CIMB Daybreak - 11 February 2015
