We attended the MPOC Malaysia Palm Oil Trade Fair & Seminar at Shangri-La Hotel in Kuala Lumpur recently and came away maintaining our expectation of avolatile 4Q16. Experts forecasted a broad CPO price range of RM2,200-3,000/metric ton (MT) in 4Q16, wider than our expected RM2,400-2,900/MT. The 2016 average of RM2,540/MT is in line with our RM2,500/MT forecast but expectation of RM2,625/MT for 2017 is higher than our RM2,400/MT as we expect a strong 2H17 production recovery to result in weaker CPO prices against 2016. Bullish near-term views were driven by limited stocks, slow production recovery, and weather catalysts. Meanwhile, bearish perspectives included potential release of China rapeseed oil reserves, weaker biodiesel production and a 2H17 production surge. We continue to beNEUTRAL on the sector with a trading view, with preference forTAANN (OP; TP: RM3.94) and UMCCA (OP; TP: RM6.50) on their above average FFB prospect. No change to our remaining calls of MARKET PERFORM on SIME (TP: RM7.90), IOICORP (TP: RM4.60), KLK (TP: RM25.00), FGV (TP: RM2.65), IJMPLNT (TP: RM3.60), TSH (TP: RM1.95)and CBIP (TP: RM2.15); and UNDERPERFORM on PPB (TP: RM15.00)and GENP (TP: RM9.80).

Attended POTS Kuala Lumpur. We attended the MPOC Malaysia Palm Oil Trade Fair & Seminar at Shangri-La Hotel in Kuala Lumpur which was held over the last two days. The theme of the event was “Overcoming Challenges, Maximizing Profits”, and the event was well attended by c.300 participants from the oils and fats industry around the world.

Significant divergence by industry experts. Heading into 4Q16, we note the wide range of forecasts between the top industry analysts, of RM2,200-3,000/metric ton (MT) for 4Q16 and RM2,100-3,000/MT in 2017 (please see overleaf for individual estimates). This is slightly more bearish compared to the Bursa POC2016 range of RM2,200-3,200/MT. Analysts noted that the expected El Nino-driven price rally in early-2017 did not materialize due to weaker-than-expected demand in India and the release of rapeseed oil reserves by China, which partly offset the fairly substantial stock drawdowns in Malaysia and Indonesia. Based on figures by experts who provided full-year averages, we calculate an average 2016 CPO price of RM2,540/MT which is 3% below the POC2016 average of RM2,631/MT – in line with the more bearish range forecast. This is also in line with our latest FY16 CPO expectation of RM2,500/MT. For 2017 however, the experts’ average CPO price of RM2,625/MT is 9% higher than our expected RM2,400/MT. We think this could be overly optimistic as 2H17 production is widely expected to recover strongly, with full-year production potentially exceeding losses seen in 2016. Hence, barring significant production disruption of other oils, or a substantial demand spike, CPO prices in 2017 are unlikely to exceed prices in 2016.

Potential catalysts: limited stocks, slow production recovery, weather. According to Mr. Thomas Mielke (Oil World), palm oil is currently undervalued due to: (i) low palm stocks and export supplies, and (ii) a slower-than-expected recovery in production, and he believes this could lead to a price rally of up to RM2,900-3,000/MT soon. Meanwhile, despite his bearish outlook of RM2,200/MT by Dec-16 (due to unfavorable Indian pricing and China release of reserves), Mr. Dorab Mistry (Godrej International) thinks that a weather problem such as La Nina could very quickly reverse palm oil sentiment. The range is in line with our 4Q16 CPO price range of RM2,400-2,900/MT, with the top-end supported by the weak stock situation and further upside potential of RM150-200/MT if a moderate La Nina develops.

Possible risks: China rapeseed oil reserves, biodiesel weakness, 2H17 production surge. Several analysts, including Dr. James Fry (LMC International Ltd.); pointed out the risk of the Chinese government further selling its rapeseed oil reserves, noting rumors of c.1.0m MT of rapeseed oil to be auctioned by year-end, out of its 3.8-4.0m MT remaining reserves. Meanwhile, Mr. Mistry observed that Indonesian biodiesel production could be flat-to-lower in 2017 as the government subsidy fund has largely drawn down its initial cushion from the start of its mid-2015 levy collection (subsidies were only paid out from Nov 2015). All experts agreed that 2H17 production is likely to see a strong recovery as trees recover from the droughts of 2014-15. As a result, most experts were only bullish on CPO prices up to 1Q17, and concurred that prices are likely to see a downtrend in 2H17, in line with our house view.

Maintain NEUTRAL with trading view. No change to our FY16-17E CPO price forecast of RM2,500-2,400/MT. The broad 4Q16 price views by leading analysts concur with our view of volatile 4Q16 CPO prices between RM2,400-2,900/MT, given mixed catalysts. We note that a strong US soy harvest and chatters of a US rate hike could also pose risk to CPO prices. Of stocks among our coverage, we reiterate our preference for upstream plantersTAANN (OP; TP: RM3.94) and UMCCA (OP; TP: RM6.50)as their younger tree age partly offsets production risk and ensures above-average FFB growth over the long-term.

Source: Kenanga Research - 14 Oct 2016