We attended the annual Palm & Lauric Oils Conference & Exhibition – Price Outlook 2016 at Shangri-La Hotel in Kuala Lumpur recently and came away with our short-term positive outlook intact. The experts’ average FY16E CPO price at RM2,631/metric ton (MT) was higher than our FY16E RM2,400/MT, likely on greater price impact expectations from lower supply. Production-wise, the speakers expect production declines in 2016 post-El Nino of between 1-4%. Meanwhile, the Indonesian biodiesel subsidy program should increase biodiesel production by 0.8-1.0m MT which could benefit CPO prices. However, demand growth in India could be taken up by soybean oil instead of palm oil due to tighter palm oil supplies, while crude oil prices may remain weak, resulting in virtual zero discretionary biodiesel demand. Overall we maintain our NEUTRAL position with a positive short-term CPO price outlook peaking at RM2,650/MT, based on USD45/MT discount to soybean oil. However, mid-term upside is limited by ample soybean oil supplies while CPO prices should soften heading into the seasonal production upswing from mid-late 2Q16. Maintain call and TP on UMCCA (OP; TP: RM7.50), CBIP (OP; TP: RM2.49), IOICORP (MP; TP: RM4.52), KLK (MP; TP: RM25.25), PPB (MP; TP: RM16.92), IJMPLNT (MP; TP: RM3.76), TSH (MP; TP: RM2.38), TAANN (MP; TP: RM5.88), SIME (UP; TP: RM7.15), FGV (UP; TP: RM1.32) and GENP (UP; TP: RM11.30).

Attended POC2016. We attended the annual Bursa Malaysia Palm & Lauric Oils Price Outlook Conference & Exhibition (POC2016) at Shangri-La Hotel in Kuala Lumpur, which was held over the last two days. POC2016 is among 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.

2016 CPO price forecast averages RM2,631/MT. Price forecasts were overall more optimistic than last year, with a FY16E CPO price low estimate of RM2,200/MT and a high of RM3,200/MT. Compared to last year, the experts’ 2015 forecasts had a wider range from RM1,650 to 2,700/MT. We think the higher estimates this year reflects consensus expectations of reduced production post-drought, and higher biodiesel demand in Indonesia. Overall, the experts’ estimates averaged out at RM2,631/MT (please see overleaf for individual estimates), 10% higher than our expected RM2,400/MT. We believe this is due to the speakers expecting a greater price impact from lower supply than our more conservative view.

Talking about the weather. El Nino was a recurring topic through the conference, with several analysts predicting production decline which could worsen if La Nina occurs in 2H16. Mr Dorab Mistry (Director, Godrej International Ltd.) and Dr. James Fry (Chairman, LMC International) have similar forecasts of combined Indonesian and Malaysian production to decline 4% to 50m MT. Meanwhile, Mr Thomas Mielke (Executive Director, ISTA Mielke GmbH (Oil World)) was more conservative, forecasting a 1% decline to 53m MT. This is roughly in line with our Malaysian production expectation of between 0 – 4% decline depending on the degree of tree stress.

Potential positive from biodiesel subsidy. Experts also highlighted the potential price support arising from the Indonesian CPO levy. Dr Fry noted that the levy creates a stabilisation mechanic for CPO prices as cheaper gasoil/higher CPO prices will increase biodiesel subsidies requirement while reducing subsidised biodiesel volume. The volume of subsidies biodiesel moves inversely to CPO-gasoil premiums, reducing CPO price fluctuations. Dr Fry, Mr Mielke and En. Fadhil Hasan (Executive Director, Indonesian Palm Oil Association) expect biodiesel production to hit 2.2-2.4m MT based on available funds from the CPO levy. While this is below the government target of 3.2m kilolitres (2.8m MT), we gather that it represents a YoY increase of 0.8-1.0m MT which could be positive for CPO prices.

Expect slower demand growth from India. Mr Mielke noted that Indian edible oils production continues to decline, which will increase import requirements. Note that Malaysian palm oil exports to India rose 14% in FY15 to 3.7m MT, making up 39% of Indian palm oil imports. However, Mr Mistry expects Indian palm oil imports to increase only 3% in 2015/16, as the bulk of Indian demand will likely be satisfied by soybean oil due to the shortage of palm oil.

Crude oil dampener. The speakers were generally neutral-to-bearish on crude oil prices, with En. Fadhil noting that crude oil futures forecast FY16-17 WTI prices at USD36-43/barrel (bbl) from USD37/bbl currently. However, Dr Fry mentioned that crude oil stocks will likely rise until late-2017 as shale productivity has increased despite lower rig counts, thus reducing the likelihood of crude oil recovery in 2016. With crude oil prices trading well below CPO prices, Mr Mielke highlighted that discretionary biodiesel demand has essentially disappeared; hence the energy use for vegetable oils occurs only where mandates are enforced.

Short-term optimism intact. Post-conference, we maintain our NEUTRAL rating on the plantation sector, although we reiterate our positive short-term outlook with a potential 3-month CPO price peak of RM2,650/MT (based on USD45/MT discount to soybean oil). We think the largely bullish price outlook presented in the conference should strengthen investors’ confidence, while rising CPO prices should serve as a short-term catalyst for the sector. However, we believe mid-term upside is limited as soybean oil supplies remain ample, while CPO prices are likely to soften once production enters its seasonal upswing from mid-late 2Q16 onwards.

Source: Kenanga Research - 10 Mar 2016