We attended the annual Palm & Lauric Oils Conference – Price Outlook (POC) 2014 at Shangri-la Hotel in Kuala Lumpur recently. In the first day of the event, three experts shared their view on CPO prices with the expectation that CPO prices should trade between RM2500-RM3050 for the rest of 2014. Meanwhile, Dorab Mistry is positive on Indonesia biodiesel policy and highlighted that the country has now emerged as the single biggest consumer and producer of palm oil. Hence, he thinks that this is a red flag to major palm oil consumers such as EU and China. While he did not provide CPO prices forecast, we believe that his view is likely to be bullish based on the points mentioned. Reiterate OVERWEIGHT on the sector with our current CY14 average CPO price forecast of RM2,800/mt. However, we are watching the current dry season closely and we wish to highlight that CPO prices could surge above RM3000 to hit RM3200 by end-Jun if the dry season extends beyond March. Our top picks are IOICORP (OP; TP: RM5.15) and TSH (OP; TP: RM4.10). We also have OUTPERFORM calls on SIME (TP: RM10.00), KLK (TP: RM26.10), PPB (TP: RM17.00), IJMP (TP: RM3.80), TAANN (TP: RM5.00) and CBIP (TP: RM4.05). Maintain MARKET PERFORM on FGVH (TP: RM4.75), GENP (TP: RM10.85) and UMCCA (TP: RM7.50).

Strong turn-up for POC 2014. We attended the annual Palm & Lauric Oils Conference –Price Outlook (POC) 2014 at Shangri-la Hotel in Kuala Lumpur recently. POC 2014 is one of the most important events in the palm oil industry and it was well attended by c.2,000 participants from the oils and fats industry around the world.

Day 1 estimate between RM2500-RM3050 for CPO prices. Indonesia Palm Oil Association (GAPKI) Executive Director, Mr. Fadhil Hassan expects CPO to trade between USD925-USD975 Rotterdam CIF (Effectively RM2875-RM3050 based on CIF cost assumption of USD40 and USDMYR rate of 3.25). He believes that Indonesia biodiesel policy implementation will increase the country's local consumption significantly. MPOC CEO expects CPO to trade between RM2600-RM3000 per mt in 2014. This is better than last year prices as he expects lower Stock-To-Usage ratio to support CPO prices. Lastly, Mr. Harald Sauthoff (BASF Vice President for Personal Care & Nutrition GmBH) expects CPO price to trade between RM2500-RM2950 in 2014 as the global economy improves.

Dorab Mistry is positive on Indonesia biodiesel policy. He mentioned that Indonesia biodiesel policy is the game changer in CPO market in 2013 as it has prevented further falls in CPO prices and helped it to appreciate. Additionally, he highlighted that Indonesia (which is the single biggest producer in the world) has now turned into the single biggest consumer in the world. Hence, he thinks that this is a red flag to major palm oil consumers such as EU and China. While he did not provide any price forecast, we believe that his view is likely to be bullish based on the points mentioned. Note that he will provide full details on his price forecast at 3.20pm 5-May-2014.

What do we think? We retain our bullish view on CPO prices and expect average CPO prices to increase to RM2900 by end March before hovering around RM2600-RM2900 for the rest of 2014. Hence, we maintain our average CPO price forecast of RM2800 for 2014 at this juncture. However, we are watching the current dry season closely and we wish to highlight that CPO prices could surge above RM3000 to hit RM3200 by end-Jun if the dry season extends beyond March. This is due to our view that CPO production would come in substantially lower below current market expectation and cause inventory to be depleted significantly to a 7-year low level of 1.25m mt by Jun-2014.

Source: Kenanga