In the Palm & Lauric Oils price outlook conference 2018 (POC2018) organised by Bursa Malaysia yesterday, four experts gave a bearish view on CPO price going forward, while Mr Mistry was rather bullish in his mid-term outlook. Most of the speakers expect CPO production will exceed 20m MT in 2018. According to Dato’ Carl Bek-Nielsen (Vice Chairman and CEO of United Plantation), the rise of middle income population from 2bn in 2017 to 5bn expected in 2050 is the engine that will drive demand of edible oil going forward as calories intake of this category is higher, estimated at 3,000 kcal/day. However, there are two main challenges that PO has to face i.e. 1) India import tariff hike; and ii) PO usage outlook in EU. Below are excerpts of their respective opinions.
Mr. Dorab E Mistry, Godrej International Limited. Dorab turned out as the only speaker that has a bullish outlook on PO. The arguments are that the growth in world economy and elections in several countries this year including Malaysia will support the CPO price and hence, it impossible to have bearish commodities. Below is excerpts of his outlook:
Mr. Thomas Mielke, ED of ISTA MIELKE GmbH the publisher of Oil World. Mielke expects CPO futures price could fall to as low as RM2,300/MT by July or August. However, CPO price could potentially appreciate to RM2,700/MT if the ringgit weakens or CPO production falls short of expectation – however he does not see the likelihood of that happening within the next six months. Prices of PO and soy oil are likely to trade sideways or slightly higher in the next 3-5 weeks, but a new price weakness likely to emerge from April 2018 onward. As Argentina currently have weather issue, global soybean output in marketing year 17/18 is expected to be considerably below potential – expected to record at 338.64m MT from 347.98m MT in 16/17 whilst total soybean consumption is seen rising to 341m MT in 17/18 from 285.8m MT in 16/17 . As there are many uncertainties, the bullish effect will be delayed and therefore, the bullish outlook of vegetables oils prices will only take place in the last quarter of this year or in 2019. On top of that, he also forecast Malaysia CPO production to increase to 20.76m tonnes (2017: 19.92m tonnes) in 2018, with Indonesia to increase by 5% to 38.8m tonnes (2017: 36.8m tonnes).
Dr. James Fry, Chairman LMC International LTD. He forecasts BMD CPO price to rise to RM2,600/MT as stocks fall and then drop to nearly RM2,300/MT before Malaysia export taxes are restored – setting the BMD floor price at RM2,200/MT. He also added that, other things being equal (stocks, etc.), for every USD10/barrel rise in crude oil prices would increase CPO price by USD70 to USD75 per tonne. He expects OPEC to keep Brent crude trading at USD65 to USD70/barrel this year.
Other key takeaways. Other experts’ views are i) Mr. U.R.Unnithan (Founder and CEO SUMWIN Group), predicts 2018 CPO price will not likely to drop below RM2,300/MT and might average about RM2,450; ii) Mr Nagaraj Meda (Transgraph Consulting Pvt Ltd), expects CPO 3-mths futures are likely to stay below RM2,650/MT and trade weak towards RM2,200 in the coming 5-6 months’ time frame; iii) Mr Ariff P. Rachmat, CEO of Triputra Agro Persada (TAP) Group forecast CPO MDEX price would trade between USD600/MT to USD650/MT (RM2,342/MT – RM2,538/MT) by third quarter of 2018; and iv) Mr. Rasheed Janmohammed from Pakistan believe that MDEX CPO price to remain between RM2,400/MT – RM2,600/MT till April 2018. However, physical prices are expected to remain steady and firm due to supply constraints and currency factors. Off note, MPOB CPO price (local delivery) as at yesterday closed at RM2,468.50/MT (Highest at RM2,547/MT at 28 Feb 2018).
Our view on CPO price. Given the negative sentiment of India import tariff and PO outlook in EU, we predict that CPO price would trade within a range of RM2,400 to RM2,700 in 1H18. We, however retain our prediction that CPO would average at RM2,600/MT in 2018 as we expect price could be higher in Q4 2018 (to trade between RM2,400/MT to RM2,800/MT) given the tight supply of soybean oil (SBO) due to higher intake by India, China and EU against expectation of production below potential, which will support price. We still believe that the major catalyst for CPO price movement is SBO price direction. We also expect stock will continue its declining trend in the coming months before picking up again in the 3Q2018 until October 2018 given the traditionally high production season in the 2H of the year. Our 2018 production figure of 20.1m tonnes is based on the assumption that: 1. production is expected to resume to normal as yield will fully recover from the lag impact of dry weather experienced in 2014/2015 and early 2016; 2. planted area to increase by c.1% to 5.89m ha (oil planted area in 2017 is estimated to increase by 1.8% to 5.84m ha against 5.74m ha recorded in 2016); and 3. additional new mature area coming to production (c. 80k ha).
What do we expect? As we highlighted in our strategy report recently, 2018 is deemed to be another challenging year for plantation companies. However, we are still bullish on the long-term prospect of this sector given a growing demand of vegetable oils due to population growth and increase in per capita income due to increase urbanization. The PO price reaction towards higher import duty by India is seen to be temporary (although negative in short-term) and price will adjust back and trading as predicted as higher intake of SBO and rapeseed oil will result in higher price of these two commodities, hence, increasing the competitiveness of PO and subsequently raising demand, and providing support for price of PO. As for PO outlook in EU, if PO was phased out from biodiesel feedstocks, there could potentially spread to food usage and would certainly have major impact on exports. Of important note, as at 2017, EU consists about 12% or 1.991m tonnes of our total PO export of 16.555m tonnes. On top of it, about 30% of Malaysia total export of CPO and PO are used as feedstock for biodiesel. However, according to the speakers during the conference, there are 60% to 90% chance that the ban will not proceed.
We are neutral on the sector as most of the plantation companies under our coverage are now fully-valued. We foresee that any further downside risk on CPO price may induce some knee-jerk reaction on plantation stocks. Against a backdrop of lower CPO price, earnings of plantation companies especially pure planters could be under pressure. The recovery in palm oil production expected for 2018 will be offset by lower CPO prices. Our top pick is SOP (TP: RM6.00) with other BUY calls include GENP (TP: RM11.92) and HAPL (TP: RM2.89). Maintain HOLD on KLK (TP: RM24.46), Batu Kawan (TP: RM20.39), IOIC (TP: RM4.80), IJMP (TP: RM2.64), TSH (TP: RM1.81), FGV (TP: RM2.00) and Sarawak Plantation (TP: RM1.64) whilst Non-Rated on THP.
Source: BIMB Securities Research - 8 Mar 2018
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Created by kltrader | Aug 12, 2024
Created by kltrader | Aug 12, 2024