We believe EU’s proposal to ban palm oil will likely be a long drawn affair, as EU committee will still need to rectify the law with the individual countries within EU. Should the proposal succeed in getting the consensus to ban palm oil, this will have an adverse impact on palm oil prices in the near to medium term, as it will be difficult for both Malaysia and Indonesia to increase exports of palm oil to other importing countries significantly within a short time span in order to fill the vacuum from EU. Over the longer term, we believe the impa ct will be less detrimental, as lower palm oil price will widen the price gap between palm oil and other competing vegetable oils, hence boosting palm oil demand from palm oil consuming countries outside of EU. Maintain Underweight stance on the sector.

The oil palm plantation sector has been in the limelight for the past few months, due to EU Resolution and its proposal to ban palm oil into Europe.

How it started. It started with the signage of Amsterdam Declaration by 6 EU countries in Dec 2015, which declared themselves as supporters of 100% Sustainable Palm Oil in Europe and their intention to end illegal logging and deforestation by 2020. Fast forward to 2017, the EU Parliament went on to vote to amend EU Renewable Energy Directorate II (REDII). While REDII does not specifically ban and/or restrict the use of palm-based biofuels, it applied new criteria for crops used for the production for biofuels (which must be sustainable and not cause deforestation through indirect land use change), of which EU deemed palm oil being unsustainable. As a result, the consumption of palm-based biofuel in EU will be capped at 2019’s level until 2023 and completely eliminated by 2030.

Both Malaysia and Indonesia view EU’s move discriminatory. Both Indonesia and Malaysia view EU’s move as discriminatory, as there is significant lack of scientific data and reliable information used in classifying palm oil production as a high Indirect Land Use Change (ILUC) risk biofuel feedstock. Both Malaysia and Indonesia have embarked on a joint mission to Brussels to convey their concerns to the EU leaders and pave the way for an amicable solution to all parties concerned.

Likely a long drawn affair. We believe the proposal to ban palm oil (even if it eventually becomes a law) will likely be a long drawn affair, as EU committee will still need to rectify the law with the individual countries within EU.

At the worst case. Should the proposal succeeds in getting the consensus to ban palm oil, it will then be adopted as an act, and this will have an adverse impact on palm oil prices in the near to medium term, as it will be difficult for both Malaysia and Indonesia to increase exports of palm oil to other importing countries significantly within a short time span in order to fill the vacuum from EU. Over the longer term, we believe the impact will be less detrimental, as lower palm oil price (resulting from the loss of EU as an important market) will widen the price gap between palm oil and other competing vegetable oils, hence boosting palm oil demand from palm oil consuming countries outside of EU.

Forecast. No change to our CPO price assumptions of RM2,300/tonne for 2019 and RM2,400/tonne for 2020 (2018: RM2,235/tonne).

Maintain UNDERWEIGHT. We maintain our Underweight stance on the sector, underpinned by its pricey valuations, weak near-term outlook (arising from current high stockpile level and absence of positive demand catalyst).

Source: Hong Leong Investment Bank Research - 16 Apr 2019