CPO prices still have room to go lower on higher output and lower demand. India’s vegetable oils imports could decline due to higher domestic output as well as lower domestic demand, as the depreciating rupee could result in imports becoming more expensive. Palm oil has lost market share to soybean oil and sunflower oil due to narrowing price discounts. We reckon CPO prices will continue to trade at RM2,250- 2,600/tonne until 1H19. Maintain MARKET WEIGHT.

WHAT’S NEW

We hosted the 2H18 Palm Oil Price Outlook Seminar in Jakarta, with Mr Dorab Mistry (Director, Godrej International) as our guest speaker, to discuss about the CPO price outlook for the remaining of 2018. Key takeaways are highlighted below.

• Current low prices might continue until 1H19. Rising palm oil production in 2H18 could lead to higher stock level as demand is likely to remain weak due to lower imports from India. Mr Dorab foresees CPO price further declining to RM2,100/tonne within the next 60 days.
• Potentially lower demand from India. India’s rising domestic vegetable oils production coupled with narrowing price gap between palm and other soft oils (due to higher import tax for palm oil in India) could potentially result in lower palm oil imports from the country. Palm oil might lose market share to sunflower and soy oils, which are generally regarded as premium oils as compared to palm. Another key factor is the depreciating rupee which could result in imports becoming more expensive, and this could further pressure vegetable oils consumption in India, thus lowering overall imports volume. Mr. Dorab expects India’s import to decline slightly to 15.0m tonnes in 2017-18, from 15.4m tonnes in 2016-17.
• Rising production in 2H18. Indonesia’s production is showing very strong growth. We understand that Indonesia’s 1Q18 production was slightly below expectation; however our channel checks show that output has started to pick up strongly starting April and May, while 2017 rainfall is sufficient to fuel robust production during the seasonally high production cycle in 2H18.

ACTION

Maintain MARKET WEIGHT. We view that CPO prices could have hit the bottom and further downside risk is limited. However, we still reckon that this is still not the good time to enter as there are no strong catalysts to lift CPO prices in the medium term. We have BUY calls on Kim Loong Resources, Bumitama, Wilmar, Lonsum, and Tunas Baru.

Source: UOB Kay Hian Research - 2 Jul 2018