Highlights

• We believe our unchanged average projected CPO price of RM2,300/mt for the full-year, translates to a higher average projected CPO price of circa RM2,400/mt for 2H, slightly higher CPO price vs. average of RM2,228/mt in 1H is supported by: 1. El Nino phenomenon, which raises concerns on supply shortage, hence supporting prices of palm oil. While it is still premature to ascertain the level of intensity of this event, and the strength does not always correspond to its impact, an El Nino event generally triggers drought in Australia, Southeast Asia, India and Africa, while brings rain to the South America, hence affecting production and prices of vegetable oil (including palm oil); and 2. Palm’s widened price discount against the soybean oil. We note that higher discount to the soybean oil price tends to attract palm oil consumption (hence supporting palm oil price), given the positive correlation between prices of soybean oil and crude palm oil.

• On the other hand, we believe higher biodiesel offtake may take a longer time to materialise as there are still several hurdles to overcome, and these include: (1) Warranties from vehicle manufacturers, both in Malaysia and Indonesia; and (2) Logistics constraints, which limits practical implementation as well as strict enforcement (particularly, in Indonesia).

Catalysts

• Implementation of higher biodiesel mandate in Indonesia and Malaysia.

• Weather uncertainties revisit, which would result 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 short-term demand and price outlook. Sector View
• Maintain our average CPO price assumptions of RM2,300/mt and RM2,400/mt for 2015 and 2016 respectively.
• We maintain our Neutral stance on the sector, given the absence of fresh catalyst.

Source: Hong Leong Investment Bank Research - 30 Jun 2015