Yesterday, CPO futures for Jan-2014 contract jumped RM72/mt or 2.85% to RM2,600/mt. We gather from Reuters that the significant increase was caused by concerns that a super typhoon which hit the Philippines recently would tighten supplies of coconut oils and indirectly shift demand to CPO. In our view, Super Typhoon Haiyan (STH) may have caused severe damage to coconut trees in the Philippines. Hence, we think a coconut oil supply shock may have already occurred in the global vegetable oil market which benefited both CPKO and CPO prices. We are keeping our estimate and Target Price at this juncture as we already expect average CPO prices of RM2,700/mt in 2014. However, we wish to highlight that CPO prices may increase up to RM2,800 by year-end if the supply damage turned out to be a full-blown crisis (assuming 25% of coconut oils (CNO) supply is damaged from Philippines).

We maintain our NEUTRAL call on the sector at this juncture with our current CY13 average CPO price forecasts of RM2,400/mt (CY14: RM2,700/mt) unchanged. Biggest beneficiaries will be planters with leverage through high FFB growth and these include TSH (OP; TP: RM2.56), GENP (MP; TP: RM9.35) and IJMP (MP; TP: RM3.00). While we have MARKET PERFORM calls on these GENP and IJMP currently, we may revise our Target Price upwards pending the details on the severity of the damage of coconut trees in Philippines.

CPO surged due to Philippines Super Typhoon Haiyan impact. Yesterday, CPO futures for Jan-2014 contract jumped RM72/mt or 2.85% to RM2,600/mt. Note that this is the highest single daily gain since 3-Jan-2013. We gather from Reuters that the significant jump was caused by concerns that a super typhoon in the Philippines would tighten supplies of coconut oils and indirectly shift demand to CPO. This is positive to CPO prices and bode well for planters earnings in 4Q2013 and possibly 2014 too.

Coconut oils supply may have been severely disrupted. Recall that the Philippines were hit by STH last Friday on 8-Nov-2013. We gather from media reports that STH may have killed more than 10,000 people. Note that the Philippines is also the biggest coconut oil producer in the world with an estimated total production of 1.73m mt (or 46% of global supply) in 2013 based on United States Department of Agriculture (USDA) estimate. As coconut trees are usually planted on the sandy areas with high rainfall near the beach, we believe that STH may have caused severe damage to coconut trees and as a result leads to coconut oil supply shock.

Crude palm kernel oil (CPKO) can be used as substitute to CNO. Note that CPKO is a good substitute to CNO as both can be used mainly to produce soap and cosmetics. This may explain the huge increase in demand for CPKO as shown by the abnormal 5% price gain to RM3,357/mt from yesterday afternoon session close. We expect planters to benefit from this as plantation companies also produce and sell palm kernel (which can be eventually processed into CPKO) as a by-product during the milling process to generate CPO from FFB.

Huge price increase in CPKO may have flow to affect CPO prices as we gather that both can be used as raw material input in the oleochemical industry. Note that olechemical end products include home and personal care applications. Although CPKO is usually used for oleochemical purpose, the sudden surge in CPKO prices may have caused demand to shift to CPO due to its cheaper prices.

All planters to benefit but the greatest impact should be on TSH, GENP and IJMP. Pending details on the severity of the damage to the coconut trees in the Philippines, we maintain our NEUTRAL call on the sector at this juncture. In case the supply crisis turns out to be full blown one and assuming 25% of supply is damaged from Philippines, we believe CPO prices may rise up to RM2,800 by year-end and we may raise our 2014 CPO prices by RM100/mt to RM2,800/mt. Biggest beneficiaries will be planters with leverage through high FFB growth and these include TSH, GENP and IJMP. 

Source: Kenanga