Speakers shared their subdued CPO price outlook at the POC 2019 event, with CPO price forecast ranging from RM1,950/mt to RM2,450/mt, with higher biodiesel blending mandates and lower soybean crushing activities being the key factors to support palm oil prices. Most speakers shared the view that the potential El Nino episode (if it happens) will likely be a mild form. Hence it is unlikely to affect palm oil production significantly. No change to our CPO price assumptions of RM2,300/tonne for 2019 and RM2,400/tonne for 2020 (2018: RM2,235/tonne). We note that our in-house average CPO price projection of RM2,300/mt in 2019 falls under the range of the experts’ views. We downgrade our rating on the sector to UNDERWEIGHT (from Neutral), following the downgrade in our ratings for CBIP, FGV and IOI last month.

Subdued price outlook. We attended POC2019 yesterday. Speakers shared their subdued CPO price outlook at the event, with CPO price forecast ranging from RM1,950/mt to RM2,450/mt (see Figure 1), with higher biodiesel blending mandates (in Malaysia and Indonesia) and lower soybean crushing activities being the key factors to support palm oil prices, and higher palm oil inventory level being the key factor to cap palm oil prices.

World biodiesel production likely hit record high in 2019. While outlook for discretionary biodiesel demand remains questionable (due to European Union’s less than friendly policies towards palm-based biofuel and rising shale output), world production of biodiesel will likely hit record high in 2019, underpinned mainly by biodiesel blending mandates in SEA and Latin America regions (see Figure 2).

Impact from US-China trade tension. The trade tension between US and China will result in lower soybean crushing activities in China, and this will result in China raising imports of vegetable oils (including palm oil).

Minimal crop impact from El Nino (if it happens). Most speakers shared the view that the potential El Nino episode (by 2Q-3Q 2019, if it happens) will likely be a mild form. Hence it is unlikely to affect palm oil production significantly.

Palm oil production growth to slow. Following a production growth of 6% in 2018, most speakers project world palm oil production growth to slow in 2019. Thomas Mielke (one of the key presenters) highlighted that palm oil is losing its competitiveness to other competing vegetable oils (in particular, soybeans, rapeseed and sunflower seed) due to (i) lack of replanting activities, (ii) rising labour cost, (iii) lower acreage growth (relative to soybean), and (iv) lower fertiliser application (when palm oil prices were low in 2018), which will in turn have an impact on palm productivity over the longer term.

Forecast. No change to our CPO price assumptions of RM2,300/tonne for 2019 and RM2,400/tonne for 2020 (2018: RM2,235/tonne). Our in-house average CPO price projection of RM2,300/mt in 2019 falls under the range of the experts’ views.

Sector rating. Share prices of most plantation stocks under our coverage have recovered considerably YTD, spurred mainly by optimism arising from recent US China trade negotiations and China’s pledge to increase its purchases of US agricultural products. As a result of the sharp rise in share prices, we downgraded our ratings for CBIP (from Buy to HOLD), FGV (from Hold to SELL), IOI Corp (from Hold to SELL) during Feb-19 results reporting quarter. Following the downgrade in our ratings in the abovementioned companies, our rating on the sector cut to UNDERWEIGHT (from Neutral Previously).

Source: Hong Leong Investment Bank Research - 7 Mar 2019