Highlights

• We attended the annual Palm & Lauric Oils Conference: Price Outlook Conference (POC 2016). Key takeaways are as the following;

• Wide range of CPO price forecast from RM2,200/tonne to RM3,200/tonne for 2016 vs our in house CPO average price assumption of RM2,400/tonne, with price expected to peak in Jun 16 before falling back in 2H as production picks up;

• Expect contraction in 2016 CPO production in both Malaysia and Indonesia with low production to stay at least until Jun/Jul 16 due to the impact from El Nino in 2015;

• Indonesia biodiesel production likely to be between 2.1m to 2.5m kl in 2016, below B20's target of 3.2m kl, in line with our expectation;

• Demand from India continues to grow in 2016 but narrowing gap with soybean price would prompt more soybean oil imports;

• Stagnant or marginal contraction in palm oil demand from China in 2015/16 likely due to economic slowdown and release of state reserve of other edible such as rapeseed oil in the coming months;

• Biggest challenge faced by the industry now is labour issue which is escalated further by the freeze in foreign worker hiring.

• We maintain Neutral on the sector with unchanged CPO Price assumption of RM2,400/tonne for 2016.

Catalysts

• Weather uncertainties revisit, which would result in supply distortion, hence boosting prices of edible oil.

• Severe-than-expected El Nino impact on FFB yield.

Risks

• Higher-than-expected soybean yield and soybean planting, resulting in lower soybean prices, hence prices of CPO.
• Backtracking of biodiesel mandate in Indonesia.
• Imposition of higher import duty on CPO by India.
• Escalating production cost (particularly labour cost).

Rating

NEUTRAL

• We maintain Neutral on the sector with unchanged CPO Price assumption of RM2,400/tonne for 2016.

Positives

• Long term sector outlook remains favourable.

Negatives

• Weak demand and high inventory in near term.

Top picks

• CBIP (BUY; TP: RM2.30)

Source: Hong Leong Investment Bank Research - 10 Mar 2016