Highlights

• Below are the key takeaways from Palm Oil Economic Review & Outlook Seminar (organised by MPOB) yesterday.

• CPO production from both Malaysia and Indonesia to increase further in 2018 (albeit at a slower growth rate)…Following a 12% increase to 56.4m tonnes in 2017 (arising from the easing of El Nino phenomenon since end-2016), CPO production from both Malaysia and Indonesia (which collectively account for 85% of the global palm oil production) is expected to grow at a slower growth rate of 4.6% to 59m tonnes in 2018.
• No mention on CPO price forecast… While none of the speakers gave their CPO price forecasts for 2018, we note that 2 out of the 3 speakers who presented on the industry’s outlook (namely Dr. Mohamad Fadhil Hassan from GAPKI, and Dr. James Fry from LMC) expect palm oil price to inch slightly higher from current level, mainly on the back of current crude oil price strength. Datuk Dr. Ahmad Kushairi Din (Chairman of MPOB), on the other hand, did not appear to be positive on CPO prices in 2018 due to several factors, which include, amongst others, higher palm production, stronger MYR (against US$) and his expectation on a slight decline in prices of soybean oil and sunflower oil.
• Dr. James Fry’s view on PME in EU… While most speakers highlighted their concerns on palm oil demand from the European Union (EU), Dr. James Fry opines that it is not easy for EU to cut out palm methyl ester (PME) from its biofuel mandate, as: (1) Local rapeseed oil seems to be the main alternative to the 3.5m tonnes of CPO biofuels, and diverting local rapeseed oil to biofuels will create a dilemma for the EU food market; and (2) 99% of all its PME is ISCC certified, which in turn meets EU’s sustainability credential.

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 (particularly labour cost).

Rating

NEUTRAL (↔)

• We maintain our average CPO price assumption of RM2,500/tonne for 2018-2019.

• Maintain Neutral stance on the sector, due to the lack of strong demand catalyst for palm oil. While La Nina and the Government’s recent move to suspend CPO export taxes will lend support to near-term CPO prices, these are just short-term catalysts.

Top Pick

• Top pick - CBIP (BUY; TP: RM2.13)

Source: Hong Leong Investment Bank Research - 19 Jan 2018