Higher biodiesel consumption yoy. Based on our discussion with Indonesia Biodiesel Producers Association (APROBI), Indonesia’s biodiesel production in 2018 is on track to meet its full-year target of 3.2m-3.5m KL, or higher than 2017’s production of 2.5m KL. APROBI highlighted that around 1.5-1.6m KL of biodiesel has been produced ytd. Meanwhile, APROBI also expects up to 500,000 KL of biodiesel exports this year, mainly to China and the EU. Biodiesel consumption from trains (initial target at B5 but could go as high as B20) are likely start in August following the series of track-tests.

Enough funds to support biodiesel blending. Indonesia BPDP Sawit (CPO Fund) is optimistic about collecting up to Rp17t of export levy by end-18. This fund will be enough to support up to 10m KL of biodiesel blending based on current PO-GO price and exchange rate. Up to 70% of total levy collected will be used to support the biodiesel programme and the rest will be used to finance replanting activities and R&D. BPDP Sawit aims to replant up to 180,000ha in 16 provinces this year and smallholders will get Rp25m per ha for the replanting costs. A total of 4.6m ha of planted areas have been earmarked for replanting under the support of CPO Fund.

US-China trade war could be positive to palm oil. China is expected to increase its soybean imports from Brazil if the import tariff of soybeans from US materialises. However, we view that the demand from China is too huge for Brazil to fulfil. We concur with Mr. Dorab’s view that China will be able to reduce soybean import if needed. The reduction can come from: a) replacing soymeal in animal feeds with rapeseed meal or/and corn DDG, and b) reducing the amount of feed per hog or per bird. Assuming that China cuts 5m tonnes of soybean imports, supply of soyoil will decline by 0.9m tonnes and palm oil could make up for the supply gap.

Impact of currency depreciation. Should the ringgit and rupiah continue to depreciate, this could lead to higher CPO prices for the producing countries in the short term. However, the depreciating rupee could be bearish for vegetable oils. India as a price-sensitive market could see a drop in domestic consumption as imported vegetable oils are now more expensive.

Palm oil could lose market share given narrowing price discount to soybean oil. Current palm oil price discount to soybean oil is at US$58/tonne, slightly lower than its 1- year average discount of US$81/tonne. The lower discount could trigger higher consumption of soybean oil from importing countries.

ASSUMPTION CHANGES

No change to our average CPO price assumptions of RM2,400/tonne for 2018 and RM2,500/tonne for 2019. In our view, CPO prices could trade in the narrow range of RM2,250-2,600/tonne towards year-end and continue to trade at these levels until 1H19.

RISKS

The key factors that will re-rate the sector:

a) El Nino. NOAA recently increased its probability of El Nino conditions to form to 65%, up from 50% previously. Should El Nino occur, it could affect palm oil production starting 2H19.

b) Higher-than-expected biodiesel production.

c) Worse-than-expected labour shortage in Malaysia.

CORPORATE

DBS Bank: Eyes Taiwan, Japan, Europe in hunt for bonds growth. DBS Bank's ambition of becoming a fixed income house to match global banks is gaining traction though current challenging financial markets make the strategy tough to execute. International banks' commitment to Asia has waxed and waned depending on their fortunes but this is not an option for DBS, said Clifford Lee, the bank's head of fixed income. (Source: The Business Times)

Esco Investments: Investing Rmb100m in China innovation centre. Singapore-based life sciences company Esco Investments is investing Rmb100m (S$21m) in a new 20,000sqm innovation centre in Jiangsu, China, the company announced last Friday. Scheduled to be completed by end-19, the centre will be an upsized version of its current manufacturing facility in the same area. (Source: The Business Times)

SECTOR

Property: CCT sells Twenty Anson for S$516m in biggest pure-office deal this year. CapitaLand Commercial Trust (CCT) is selling Twenty Anson, a 20-storey office building in Tanjong Pagar, to an undisclosed buyer for S$516m in the biggest pure-office, real-estate deal this year. The announcement by the trust's manager on Friday confirms a report by The Business Times last month that such a divestment was in the works as part of CCT's ongoing asset portfolio reconstitution.

Source: UOB Kay Hian Research - 2 Jul 2018