Investment Highlights

• NEUTRAL. We believe that CPO prices would soften in 2H2021 as industry palm production increases. We also reckon that currently, prices of soybean and soybean oil are toppish and have already reflected concerns over the cold weather in the US and dry weather in Brazil. Hence, we are neutral on the plantation sector in 2H2021.

• Keeping 2021F CPO price assumption of RM3,000/tonne. Although MPOB spot prices exceeded RM4,000/tonne in most of 1H2021, average CPO price realised by the companies in our coverage ranged from RM2,900/tonne to RM3,200/tonne. The discrepancies between the spot and realised prices were due to forward sales of CPO carried out at weaker prices and lower CPO prices in Indonesia. Hence, we are keeping our average CPO price assumption of RM3,000/tonne for 2021F.

• ESG is a drag. We would turn positive on the plantation sector if ESG risks ease and if industry palm production in 2H2021 turns out to be weaker than expected. We believe that the lifting of the US ban on Sime Darby Plantation’s (SDP) Malaysian palm products would provide a reprieve to the sector as it would alleviate concerns of labour abuse. We do not have any BUY in our stock universe.

Supply Factors

• Industry palm production to pick up in 2H2021. 2H usually accounts for 55% to 60% of the year’s CPO output while 1H makes up 40% to 45%. 2H accounted for 52.7% of Malaysia’s CPO production in 2020. Currently, most palm companies in our coverage are expecting a FFB production growth of 0% to 5% in FY21F. In the recent quarterly reporting period, the planters recorded FFB output growth of -12.9% to 9.8% YoY (Malaysia and Indonesia divisions) in their cumulative reporting period. One planter revised the estimate of its FY21F FFB output growth to 5% from 5%–8% previously. The other plantation companies maintained their forecasts of FY21F FFB production growth.

• Indonesia’s CPO output to be higher in 2021F. A recovery in FFB yields, which were affected in 2020 by the lagged impact of 2019’s drought, is envisaged to support the YoY improvement in CPO output in 2H2021. Oil World estimates Indonesia’s CPO output to be 45.3mil tonnes in 2021F, 7.9% YoY higher. The Indonesian Palm Oil Association expects the country’s CPO production to be 49.0mil tonnes in 2021F, which is an increase of 3.4% from 47.4mil tonnes in 2020. In 1Q2021, the industry FFB production in Indonesia was mixed. We believe that certain locations such as Sumatra and Central Kalimantan performed better than others. Golden Agri Resources’ FFB production surged by 32.0% YoY in 1Q2021 while Bumitama Agri’s FFB output expanded by 26.4%. On the other hand, PT Astra Agro Lestari’s FFB production fell by 3.2% YoY in 1QFY21. Also, PT Dharma Satya Nusantara’s FFB output slid by 3.5%.

• Mixed views on Malaysia’s 2021F CPO production. Currently, Oil World forecasts Malaysia’s 2021 CPO production to be 500,000 tonnes lower at than 2020’s 19.1mil tonnes. LMC International expects CPO output in Malaysia to be below 19.5mil tonnes in 2021F compared with 19.14mil tonnes in 2020. On the other hand, the Malaysian Palm Oil Council estimates Malaysia’s CPO output to be 19.6mil tonnes in 2021, 2.4% YoY higher.

• New foreign workers are unable to enter Peninsular Malaysia and Sabah. We believe that plantation companies in Malaysia are facing labour shortage of at least 15% presently. The labour shortage may widen to 20% or more during the peak production period in 2H2021. To mitigate the shortage of harvesters, general workers have been tasked to collect loose fruits in the oil palm estates so that the harvesters can focus on harvesting FFB. Presently, only existing workers who have returned to Indonesia, are allowed to re-enter Malaysia. However, the workers have not arrived yet due to the Covid-19 outbreak.

• Global soybean inventory is forecast to increase by 5.2% to 92.6mil tonnes in 2021E/2022F. The USDA has forecast global soybean inventory to rise by 5.2% to 92.6mil tonnes in 2021E/2022F from 88.0mil tonnes in 2020/2021E. This is mainly due to a 5.9% increase in soybean production, which more than offsets stagnating global soybean exports in 2021E/2022F. The expansion in global soybean output in 2021E/2022F is expected to be driven by a 6.5% increase in US soybean production and 5.1% rise in Brazil.

• US soybean inventory to climb by 15.3% to 4.2mil tonnes in 2021E/2022F. This is mainly due to a 6.5% increase in soybean production and 9.0% fall in exports. We believe that after China’s blistering purchases of US soybeans in 2021E, the country would have ample reserves in 2022F. The improvement in US soybean production in 2021E/2022F is envisaged to be underpinned by increases in planted areas and yields. US farmers are anticipated to plant soybeans on 87.6mil acres in 2021E/2022F vs. 83.1mil acres in 2020/2021E. US soybean yields are estimated to be 50.8 bushels per acre in 2021E/2022F compared with 50.2 bushels per acre in 2020/2021E.

Demand Factors

• India’s monthly palm demand may rise in 3Q2021 due to lower CPO import duty for three months. According to an industry player, India may buy additional 500,000 tonnes of palm oil in the coming three months and hence, average monthly imports could be around 850,000 tonnes. We believe that India’s normal palm imports are around 700,000 to 800,000 tonnes per month. The import duty on CPO will be lower at 30.25% from 30 June to 30 September 2021 vs. the previous rate of 35.75% due to a reduction in the base import duty. In contrast, the total import duty for soybean and sunflower oil is 38.5% each.

• India’s demand may ease in 4Q2021 as the import duty on CPO reverts to 35.75%. We expect India’s demand to ease in 4Q2021. We believe that there would be sufficient inventory of vegetable oils in 4Q2021 as India’s palm usage is expected to be weak in 3Q2021. This is due to Covid-19 restriction measures, which have affected demand from the HORECA segment. HORECA is estimated to account for 40% to 60% of India’s palm consumption.

• China’s palm demand may be unexciting in 2021F. We think that China’s palm imports may be the same or lower than an estimated 6.78mil tonnes in 2020. Malaysia’s palm exports to China contracted by 42.0% YoY to 525,927 tonnes in 5M2021. On the other hand, China’s soybean imports rose by 12.8% YoY to 38.2mil tonnes in 5M2021. We attribute the weaker palm demand in 2021F to a large supply of soybean oil. China’s soybean imports reached a record 100.3mil tonnes in 2020 (2019: 88.5mil tonnes) as the country’s hog population recovered from the African swine fever and as China committed to its agricultural purchases under Phase 1 of the US-China trade deal.

• EU’s palm demand is expected to decline in 2021F. Some countries in the EU have banned palm biodiesel ahead of the EU’s deadline of 2030F. These include Belgium, France and Denmark. Under the EU’s current guidelines, usage of palm biodiesel is capped at 2020’s level from 2021F to 2024F. From 2025F to 2030F, palm biodiesel would be phased out to zero. About 50% of palm are used in the biodiesel sector in the EU. Major biodiesel producers in the EU areSpain and Germany. Malaysia’s palm exports to the EU dropped by 31.4% YoY to 606,170 tonnes in 5M2021.

• Bright spot in Indonesia’s domestic biodiesel consumption. Indonesia’s biodiesel consumption is estimated to be 9.2mil kiloliters (8.0mil tonnes) in 2021F vs. 8.0mil kiloliters (6.97mil tonnes) in 2020. The improvement in the country’s biodiesel consumption in 2021F is expected to be underpinned by higher transportation activities. If Indonesia implements B40 in 2022F, Indonesia’s biodiesel consumption would increase to 14.2mil kiloliters (12.4mil tonnes). This would be almost 25% to 30% of the country’s 2021F CPO production. Indonesia’s biodiesel consumption was 1.94mil kiloliters (1.7mil tonnes) in 1Q2021 vs. 2.25mil kiloliters (1.96mil tonnes) in 1Q2020.

• But a delay in Malaysia’s biodiesel activities again. After delays in 2020 and 2021, the B20 biodiesel programme would only be implemented in Peninsular Malaysia at the end of 2022F. This is due to the Covid-19 outbreak. Recall that Malaysia was supposed to implement the B20 biodiesel policy in Peninsular Malaysia in June 2021. B20 was implemented in Sarawak in September 2020 and Sabah in January 2021. B20 is estimated to absorb about 1.26mil tonnes of CPO from the market in total. This would be about 6.6% of Malaysia’s CPO production of 19.1mil tonnes in 2020.

Source: AmInvest Research - 8 Jul 2021