We attended the International Palm Oil Congress and Exhibition 2017 (PIPOC 2017) and returned with our NEUTRAL outlook on the palm oil sector unchanged as the recent rise in crude oil prices could be offset by a high production outlook and the recent jump in Indian edible oil import duties. While key analyst Dr James Fry (LMC International) expects higher crude oil prices at USD60-65/barrel (bbl) to raise the peak for CPO prices to RM2,800-2,950/MT, Mr Oscar Tjakra (Rabobank) noted the rising availability of both palm oil and soy oil to outweigh demand in 2018, for a lower CPO price range of RM2,300-2,500/MT. Analysts, however, agreed that the Indonesian biodiesel mandate serves as a key price floor factor, and should prove positive for Malaysian demand and global palm oil prices should subsidized volumes be increased. Meanwhile, the recent increase of Indian import duties for CPO (from 15% to 30%) and RBD palm oil (from 25% to 40%) could be short-term negative for Indian demand and thus, dampen CPO prices towards the year-end. We maintain our FY17-18E CPO price forecasts at RM2,700-2,400/MT given the rising supply outlook. We continue to prefer PPB (OP; TP: RM19.00) and SAB (OP; TP: RM5.25) as they are partly shielded from volatility given their integrated operations and diversification. Other calls are maintained, namely OUTPERFORM on IOICORP (TP: RM5.00), TSH (TP: RM2.00), UMCCA (TP: RM7.15), and CBIP (TP: RM2.20); and MARKET PERFORM on SIME (TP: RM9.65), KLK (TP: RM26.35), GENP (TP: RM10.30), FGV (TP: RM1.95), IJMPLNT (TP: RM3.15), HSPLANT (TP: 2.80) and TAANN (TP: RM3.50).

International Palm Oil Congress and Exhibition 2017. We attended the biennial International Palm Oil Congress and Exhibition 2017 (PIPOC 2017) hosted by the Malaysian Palm Oil Board (MPOB) at the KL Convention Center from 14-16 November 2017. The event was well attended with some 2,500 participants in a series of five concurrent conferences, namely; (i) Agriculture, Biotechnology & Sustainability Conference, (ii) Chemistry, Processing Technology & Bio-Energy Conference, (iii) Oleo & Specialty Chemicals, and (iv) Global Economics & Marketing Conference, and (v) Food, Health & Nutrition Conference, as well as a trade exhibition promoting products, equipment and services geared towards the palm oil industry.

CPO price supported by crude oil surge. Dr James Fry (LMC International) discussed the recent crude oil price surge which he believes was due to Saudi Arabian production cuts prior to its Aramco listing. With Brent prices at USD65/barrel (bbl), he believes prices could hit a peak of RM2,950/metric ton (MT). Based on the current CPO price premium to Brent prices, he thinks that each USD5/bbl change in Brent price should lead to a USD36/MT change in CPO prices, or c.RM150/MT. Ms. Ivy Ng (CIMB Investment Bank) concurred with the supportive factor of crude oil prices and forecasted FY17-18E CPO prices to hit RM2,800-2,700/MT on the back of Indonesian biodiesel mandates, supportive crude oil prices and potential weather risk, noting that discretionary biodiesel consumption should prove to be a more significant factor should crude oil prices go beyond the breakeven cost of USD80/bbl. However, Mr. Oscar Tjakra (Rabobank) pointed out that the rising availability of both palm oil and soy oil could dampen prices in 2018, holding a more bearish view of RM2,300-2,500/MT through 2018. We believe that rising palm oil stocks and a strong 2018 production outlook will lead to higher supply outweighing stable demand. Thus, we expect 2018 CPO prices to soften 11% to RM2,400/MT (from RM2,700/MT in 2017).

Biodiesel as a floor. Key speakers including Dr. Fry and Mr. Tjakra stressed on the importance of the Indonesian biodiesel mandate to CPO prices to support global palm oil prices. However, the Indonesia biodiesel fund (BPDP) would need to balance its two mandates, namely biodiesel subsidies and replanting subsidies in order to ensure long-term sustainability of prices and production. With the USA threat to impose tariffs on Indonesian biodiesel exports, Mr Tjakra expects 2018 Indonesian biodiesel production to largely focus on local consumption and expects c.3.5m kiloliters (c.3.1m MT) of biodiesel production in 2018, making up c.35% of Indonesia’s total palm oil consumption. As observed by Dr. Fry, higher Indonesian biodiesel usage has a positive effect on Malaysian palm oil. Lower volume of Indonesian palm oil available for export would both increase global palm oil prices and increase the demand for Malaysian palm oil.

Bearish on higher Indian import duties. Mr B.V. Mehta of the Solvent Extractors Association (India) observed that high imports of processed palm oil (PPO) had led to a drop in Indian refining utilisation. He observed that the export duties from palm producing countries led to a shift from palm oil to soft oils. However, we note that India has just announced on 18-Nov that it is raising its edible oils import duties by an additional 12.5-15% with higher increases for CPO, RBD palm olein and refined soybean oil among others (please refer to full duties table overleaf), to support local oilseed prices. With local production still well below national consumption levels, we expect the demand suppression to be only temporary, although as noted by Ms. Ivy Ng, this could be negative for CPO prices in the short term.

Maintain NEUTRAL on plantation sector. While the recent increase in crude oil prices raises the price floor for CPO trading, rising edible oil production and the sharp increase in Indian import duties could be short-term negative for prices. We maintain our FY17-18E CPO price forecast at RM2,700-2,400/MT due to a rising supply outlook. We continue to prefer PPB (OP; TP: RM19.00) and SAB (OP; TP: RM5.25) due to their integrated palm oil operations and diversification which should offset short-term CPO price volatility.

Source: Kenanga Research - 20 Nov 2017