We attended the annual Palm & Lauric Oils Conference & Exhibition – Price Outlook 2015/2016 at Shangri-La Hotel in Kuala Lumpur recently and came away slightly more optimistic on near-term CPO prices but maintain our bearish view for 2H15. The average experts’ FY15E CPO price forecast was RM2,248/MT, with a wide range between RM1,650/MT-RM2,700/MT. The wider range could indicate a more cautious outlook in 2015 while volatility is likely to be higher and event-driven. Production-wise, the experts expect tighter stocks in 1H15 due to weak production but this should ease in 2H15. Meanwhile, ample soybean harvest is likely to persist while biodiesel could be an important swing factor – but meeting the Indonesian mandate could be an unachievable target for this year. Overall we remain NEUTRAL on plantations with an unchanged FY15E CPO forecast of RM2,200/MT as we expect flattish CPO production, while cheap soybean oil (SBO) is likely to cap prices and biodiesel outlook remains challenging. With our expectation of stronger 1H15 and weaker 2H15, we favor short-term plays on midsize pure planters, including TAANN (OP; TP: RM4.44) and TSH (MP; TP: RM2.30). Maintain call and TP on SIME (MP; TP: RM9.64), PPB (MP; TP: RM15.42), UMCCA (MP; TP: RM6.68), IOICORP (UP; TP: RM4.40), KLK (UP; TP: RM20.34), GENP (UP; TP: RM9.57), IJMPLNT (UP; TP: RM3.57) and CBIP (UP; TP: RM2.05).

Attended POC2015. We attended the annual Palm & Lauric Oils Conference & Exhibition – Price Outlook 2015/2016 at Shangri-La Hotel in Kuala Lumpur over the last two days. POC2015 is one of the major events in the palm oil industry and was well attended by c.2,000 participants from the oils and fats industry around the world.

Average CPO price forecast at RM2,248/MT. We noticed a wide range of CPO estimates given, with a low of RM1650/MT and a high of RM2700/MT, while experts’ FY15 estimates averaged out to RM2,248/MT (please see overleaf for individual estimate). Note that this is only a 2% variance from our own estimate of RM2,200/MT for FY15. We also observed that several speakers, including Mr. Dorab Mistry (Director, Godrej International Ltd.) and Dr. James Fry (Chairman, LMC International) distinguished in 1H15 and 2H15 with an average 1H15 estimate of RM2,337/MT and to weaken to RM2,159/MT in 2H15 due to changing supply dynamics. Against 2014, experts’ price forecast was narrower in range from RM2,500-RM3,125 compared to the actual 2014 range of RM1,942-RM2,922/MT and average at RM2,384/MT. We think the wider forecast range could indicate a more cautious outlook this year while volatility is likely to be higher and event-driven by CPO production levels, soybean crop and biodiesel implementation among others.

“Two Halves” in FY15E CPO Production. Several analysts highlighted that CPO stocks will be tight in 1H15 due to seasonally weaker FFB production. Production should recover in 2H15 but Mr. Mistry and Mr. Mielke expect 2015 production to be 19.5m MT (-1.0% YoY) and 19.4m MT (-1.5%) respectively, compared to 2014’s 19.7m MT. We note that this is more conservative than MPOB’s own 2015 CPO production forecast of 20.1m MT (+2%). Comparatively, our in-house forecast falls squarely in between this range at 19.8m MT (+0.5% YoY) which we deem reasonable given the flattish growth rate due to poor weather conditions in late-2014 to early-2015.

Expect ample soybean supply to continue. The experts agreed that soybean production growth should continue in 2015 with Mr. Mielke estimating additional 37m MT of soybean supply in 2015 (+11% YoY to 380m MT). This should lead to softer soybean oil (SBO) prices and hence a narrower SBO premium to CPO prices. Notably, SBO premium to CPO prices have narrowed to USD76/MT as of 3-Mar from a 2-year average of USD167 in FY13-14A (-54%). As a substitute product, we think the SBO price will act as a cap to CPO price. Hence, the continued strong soybean harvest should be negative for CPO prices.

Biodiesel to be key swing factor. During the conference, the experts stressed the importance of a successful implementation of the Indonesian biodiesel mandate in order to be supportive of CPO prices. However, most analysts think Indonesia may not achieve the mandated amount this year. Mr. Mistry estimated additional consumption at best to be 0.5m MT (+31% to 2.1m MT) in 2015 against the Indonesian government target of 3.0m MT. Dr Fry pointed out that reduced export duties result in higher cost of feedstock and hence causes biodiesel production to be less attractive. We agree with their view that at the current zero duty and low crude oil environment, biodiesel production is uneconomical and meeting the government mandate will be challenging.

Maintain NEUTRAL outlook on Plantations with unchanged CPO forecast at RM2,200/MT. We highlight that the average expert estimate at RM2,248/MT is only at 2% variance from our own estimate of RM2,200/MT. Also, we concur with the general consensus that CPO production is likely to recover in 2H15 and hence to exert downward pressure on CPO prices. In light of the low variance <5% of our estimate, we maintain our forecast at RM2,200/MT in FY15 and reiterate our NEUTRAL view on the Plantation sector. We are near-term positive on pure planters over downstream players as downstream margins should stay depressed due to the zero CPO export duty. We think 1Q15 is likely to improve QoQ over 4Q14 due to better CPO prices (averaging RM2,280/MT QTD vs RM2,194 in 4Q14, or +4%) and flat-to-improving FFB production prospects. Hence for short-term plays we prefer mid-size planters with good on-going FFB growth, including TAANN (OP; TP: RM4.44) and TSH (MP; TP: RM2.30). 

Source: Kenanga