Highlights

• The Government targets to raise biodiesel mandate from B7 to B10 effective Oct-2015.

• According to Datuk Amas Douglas Uggah Embas (Minister of Plantation Industries and Commodities), the meetings with stakeholders, i.e. planters will be concluded by end-June and the ministry will finalise the papers on the implementation for submission to the cabinet by then.

• The implementation of B10 biodiesel programme is expected to soak up an additional 300,000 mt of palm oil to 1m mt/annum.

Pros/Cons

• Positive to the sector, as the implementation of B10 will lift palm oil consumption by 300,000 mt/year, equivalent to circa 13.6% of Malaysia’s palm oil stock level at end-Apr.

Catalysts

• Implementation of higher biodiesel mandate in Indonesia and Malaysia.

• Weather uncertainties revisit, resulting in supply distortion, hence boosting prices of edible oil.

Risks

• Higher-than-expected soybean yield and soybean planting, resulting in lower soybean prices, hence prices of CPO
• India imposes higher import duty on CPO
• Escalating production cost (in particularly, labour cost)

Rating

NEUTRAL

Positives

• Long term sector outlook remains favourable

Negatives

• Weak demand and price outlook Sector View
• B10 biodiesel implementation aside, we note that several other development (i.e. weak RM against the US$, increased possibility of El Nino episode developing, increased exports demand ahead of fasting month, and soybean oil price rally on the US Environmental Protection Agency’s move to raise biodiesel usage) are aiding to the recent palm oil price rally.
• We maintaining our average CPO price projections of RM2,300/mt and RM2,400/mt for 2015 and 2016 respectively for now, pending further development of El Nino episode. YTD, CPO spot price averaged at RM2,223/mt.
• Maintain our Neutral stance on the sector.

Source: Hong Leong Investment Bank Research - 9 Jun 2015