Investment Highlights

• NEUTRAL. We are Neutral on the plantation sector as prospects are mixed. Positive factors are resilient demand from China and healthy biodiesel consumption in Indonesia. Negative factors are higher palm output in Malaysia and Indonesia as well as weak demand from the EU and India.

• Average CPO price assumption of RM4,000/tonne in 2024F vs. RM3,800/tonne in 2023. The improvement in CPO price in 2024F is expected to be underpinned by strong demand from the biodiesel industry in Indonesia. GAPKI (Indonesia Palm Oil Association) expects the country’s palm exports to drop by 4% in 2024F as B35 drives domestic consumption. Our CPO price assumption of RM4,000/tonne implies a trading range from RM3,500/tonne to RM4,500/tonne in 2024F.

• We would upgrade the sector to Overweight if CPO production is lower than expected. Factors that may lead to a poor CPO production are tree stress, dry weather, tree diseases and a shortage of workers. Currently, there is no indication of tree stress. Also, the shortage of workers in Malaysia has been alleviated by a massive recruitment exercise from late-2022 to the middle of 2023.

• Reiterate 3-star ESG rating. The main ESG risks for the palm oil sector are greenhouse gas emissions and labour issues. Although plantation companies are carrying out initiatives to minimise carbon emissions and eliminate the mistreatment of labour, we believe that it will take 5 to 10 years to achieve net zero. Hence, we ascribe a 3-star ESG rating to the plantation sector. Supply factors

• Indonesia’s CPO production is expected to be flat or slightly higher in 2024F. Oil World forecasts Indonesia’s CPO production to be flat at 48mil tonnes in 2024F while GAPKI (Indonesia Palm Oil Association) estimates the country’s palm output to grow by 5% to 50.9mil tonnes. FFB production growth of major Indonesia planters ranged between -7% and 6.2% YoY in 9M2023.

• CPO output growth in Malaysia to be decent in 2024F. Oil World estimates Malaysia’s CPO production at 18.4mil tonnes in 2024F (2023E: 18.7mil tonnes). In contrast to Oil World, we believe that Malaysia’s CPO production growth would be stronger in 2024F due to a higher number of estate workers The impact of a larger workforce was only felt in 2H2023 as it took 3-6 months to train the workers. Recall that there was a shortage of 70,000-80,000 estate workers in the palm oil sector in Malaysia in 2022.

• Minimum impact from haze and El Nino. There were hotspots in Sumatra and Kalimantan in 3Q2023, but they did not last long as monsoon rains arrived. According to Bumitama Agri, rainfall at its oil palm estates in Kalimantan were less than 100mm only in August 2023. In Malaysia, rainfall was sufficient for the most part of 2H2023. According to the Meteorological Department, the Standardised Precipitation Index in the palm oil regions of Sabah such as Sandakan and Lahad Datu were normal from March 2023 to September 2023. Hence, we think that the impact of haze and El Nino on FFB yields in Malaysia and Indonesia would be minimal in 2024F. For haze or dry weather to affect FFB production, rainfall must be less than 150mm per month for 2-3 months in a row.

• Global soybean inventory to rise by 14.2% to 114.5mil tonnes in 2023E/2024F. This is expected to be led mainly by Argentina and Brazil. According to USDA, soybean stockpiles in Brazil are anticipated to expand by 18.7% to 39.7mil tonnes in 2023E/2024F while in Argentina, soybean inventory is envisaged to be 24.6mil tonnes in 2023E/2024F vs. 17.2mil tonnes in the previous season.

• Global soybean output to expand by 7.6% to 400.4mil tonnes in 2023E/2024F mainly due to Brazil. USDA forecasts soybean production in Brazil to improve by 3.2% to 163mil tonnes in 2023E/2024F from 158mil tonnes in 2022/2023E. Soybean output in Argentina is expected to surge to 48mil tonnes in 2023E/2024F from 25mil tonnes in 2022/2023E in the absence of drought. On the other hand, US soybean production is anticipated to decline by 3.3% to 112.4mil tonnes in 2023E/2024F due to a drop in planting areas.

• Ukraine has a new shipping corridor. Ukraine has established a new shipping route from its ports in Odessa after Russia pulled out of the Black Sea Grains Export Corridor in July 2023. Shipments from Ukraine have been arriving in Romania, Bulgaria and Italy. The flow of trade from Ukraine has improved the supply of corn and wheat in the global markets. Corn accounted for 51% of volumes shipped out from the Black Sea Grains Corridor last year while wheat accounted for another 28%. Demand factors

• Indonesia’s biodiesel consumption is expected to rise by 16.5% to 13.4mil kilolitres (11.7mil tonnes) in 2024F. This is mainly due to the full year impact of B35. Although B35 was rolled out in February 2023, it was only implemented in August as the infrastructure was not ready yet. Indonesia’s biodiesel consumption is estimated at 11.5mil kilolitres (10mil tonnes) in 2023E. Indonesia’s biodiesel consumption was 8.9mil kilolitres (7.8mil tonnes) in 9M2023. The biodiesel consumption of 11.7mil tonnes in 2024F would be 20% to 25% of the country’s CPO production. Indonesia is currently carrying out tests on B40.

• China’s palm demand is expected to remain healthy. China’s demand for soft commodities such as palm and soybean are envisaged to remain robust in 2024F. The large price discount between CPO and soybean oil is expected to support China’s demand for palm oil. The establishment of an oleochemical plant by Apical Oleochemical in Jiangsu in June 2023 is also envisaged to spur palm imports. The new oleochemical plant has a production capacity of 600,000 tonnes per year.

• CPO is trading at a huge discount to US soybean oil. The price discount between CPO and US soybean oil is 30% or US$360/tonne currently compared to the 5-year average of 20%. The large price disparity is partly contributed by the depreciation of MYR against USD. The MYR has weakened by 5.4% against USD since the beginning of 2023.

• India’s palm demand may ease in 2024F. This is due to huge reserves of edible oils in the country. India’s purchases of palm products were robust in 2023E as prices declined and the differential with competing oils widened. According to the Solvent Extractors Association of India, the country’s palm purchases may fall to 15mil tonnes in 2023E/2024F from 16.5mil tonnes in the previous season. As of 1 November 2023, inventory of edible oils at the ports and pipelines in India was 3.1mil tonnes vs. 2.5mil tonnes a year ago. India’s record high inventory was 3.7mil tonnes, which was registered on 1 September 2023.

• EU’s palm demand to remain weak. We believe that palm oil would still be used in EU but only in the oleochemical industry. We reckon that demand for palm oil in the food and transportation sectors in the EU would be small. Exception is used cooking oil, which is allowed for the production of biodiesel. Recall that EU is expected to phase out palm biodiesel by 2030F. Also in December 2024, EU will be implementing the anti-deforestation law, which bans palm oil from areas which have been deforested after 1 December 2020. According to an EU official, the bloc’s palm imports will decline to 3.3mil tonnes in 2032F from 6mil tonnes in 2020/2022.

Source: AmInvest Research - 4 Jan 2024