We attended the MPOB Palm Oil Review & Outlook (R&O) Seminar 2018 and returned maintaining our NEUTRAL outlook as downside on higher production is partly offset by crude oil price appreciation raising the price floor. MPOB announced the official 2017 average CPO price at RM2,783/MT which exceeded both our RM2,700/metric ton (MT) forecast and consensus RM2,670/MT estimate by 3% and 4%, respectively. MPOB also provided its production expectation growth of +3% to 20.5m MT, which comes in at a lower growth rate than Indonesia’s +5% to 38.5m MT but in line with our expected range of +0-6% to 20.0-21.1m MT. Meanwhile, biodiesel was a key topic at the conference with speakers stressing the need for further mandatory programs and enforcement of discretionary blending requirements. The recent EU vote to ban palm biodiesel was also discussed as a potential demand dampener. We agree that short-term demand may take a hit, but the resulting shift of local edible oils supply into biodiesel may prompt a longer-term shift in palm demand from biodiesel into food use. Overall, we continue to remain NEUTRAL on the sector with CPO prices to trade sideways on limited catalysts but with low downside given supportive crude oil prices. We continue to prefer PPB (OP; TP: RM19.00) and IOICORP (OP; TP: RM5.00) as they are partly shielded from volatility given their integrated operations and diversification. Other calls are maintained, namely OUTPERFORM on FGV (TP: RM2.00), CBIP (TP: RM2.10) and SAB (TP: RM4.95); MARKET PERFORM on SIMEPLT (TP: RM5.50), KLK (TP: RM25.00), GENP (TP: RM10.30), TSH (TP: RM1.75), HSPLANT (TP: 2.60), TAANN (TP: RM3.60) and UMCCA (TP: RM6.80), and UNDERPERFORM on IJMPLNT (TP: RM2.50).

2017 average CPO prices average RM2,783/MT. We attended the annual Palm Oil Review & Outlook (R&O) Seminar 2018 organized by the Malaysian Palm Oil Board (MPOB) at the Putrajaya Mariott Hotel on 18 Jan 2018. The event was well attended, with c.330 participants from across the industry. At the seminar, MPOB Director General Dr. Ahmad Kushairi Din announced the average CPO price for 2017 of RM2,783/MT which came in 3% above our forecasted RM2,700/MT and 4% over the consensus average of RM2,670/MT. This marked continued price increase of 5% from 2016’s RM2,653/MT albeit at a full-year downtrend due to palm oil stocks recovering through the year.

2018 production to rise 3% to 20.5m MT. MPOB expects to see palm oil production recovery in 2018, at +3% to 20.5m MT with largely favourable weather seen in 2017. This is slightly lower than IPOA’s expectation of +5% to 38.5m MT in Indonesia, likely due to Indonesia’s younger average tree age leading to better production growth prospect. Our own projections are similar, at a range of 20.0 to 21.1m MT (implying growth of 0-6%), which is premised on record year production (seen in 2015) and the highest monthly production levels over the last five years. We think this is fair considering the sharp production setbacks seen in 2016-2017 disrupting the otherwise positive long-term production trend.

Banking on biodiesel. The key speakers providing price outlooks, Dr. Fadhil Hasan of the Indonesian Palm Oil Association (IPOA) and Dr. James Fry of LMC International highlighted that crude oil prices have appreciated as palm oil prices declined in end-2017 with Dr. Fry observing the narrowing premium of CPO against Brent crude oil as stocks increased. However, in order to support CPO prices, Dr. Fadhil believes that enforcement of non-Public Service Obligation (PSO) blending, higher mandatory blending volumes, and further promotion of China and India mandatory programs would be required. We agree that this year may see the resurgence of discretionary palm biodiesel blending but expect gasoil prices to continue to act as a floor to prevent significant price drops.

European palm biodiesel ban called into question. Several speakers brought up the recent EU Parliament vote to ban palm biodiesel, which could dampen demand given the high proportion of palm oil exports to the EU used for biofuel (40-50%). Dr Fry found the move puzzling, as palm producers have met the standards set by the EU for the import of palm biodiesel, while using alternative feedstocks would both increase edible oil prices and require higher deforestation to produce biodiesel feedstock from less land-efficient crops. Nevertheless, while the EU vote on 17 Jan 2018 is not final, pending the final draft of the legislation, we believe that the strongly negative perception of palm oil in Europe will likely result in the laws being passed. Upon enactment of the law, we would expect softer near-term demand from the EU but we think that with the EU’s local rapeseed oil likely to replace palm biodiesel as the main feedstock, this would create a supply gap in edible oils for food consumption. This could be a potential market for palm oil, depending on the degree of consumer sentiment, and overall result in a shift in EU demand from biodiesel into food usage over the longer run.

Reiterate NEUTRAL on plantation. With limited strong price catalysts but downside support, we continue to expect CPO prices to trade sideways with a 1Q18 CPO price range of RM2,370-2,575/MT. Given that CPO prices are approaching gasoil price levels, the reintroduction of biodiesel demand should provide a good price floor. However, a weaker USD/MYR could pose a risk to RM-based CPO prices. With the broad expectation of palm production recovery, we maintain our expectation of mid-to-long-term price weakness. Thus, we continue to favour integrated plantation picks such as PPB (OP; TP: RM19.00) and IOICORP (OP; TP: RM5.00) which should see less earnings volatility in a declining CPO price environment.

Source: Kenanga Research - 19 Jan 2018