We attended the Palm & Lauric Oils Price Outlook Conference & Exhibition (POC 2018) hosted by Bursa Malaysia, where experts forecasted 2018 CPO prices at RM2,515/metric ton (MT), or 5% above our expected RM2,400/MT. Price forecasts ranged between RM2,200-2,800/MT, lower than 2017’s range of RM2,200- 3,100/MT. Key themes include catalysts such as South American weather risks and higher Indonesian biodiesel mandate, while bearish factors include the increased Indian palm oil import tariff, rising palm stock levels and potential reinstatement of Malaysian CPO export taxes. Malaysian palm oil production expectations were largely in line with MPOB’s 20.5m MT expectation. We concur with the general outlook of positive shortterm price bias as inventory should decline in Feb 2018. However, higher Indian palm oil tariffs could weaken near-term demand, which, combined with production improvements in 2H18, could lead to a softer price outlook. Thus, we maintain our NEUTRAL outlook on the sector and 2018 CPO price forecast at RM2,400/MT. We continue to favour PPB (OP; TP: RM19.85) as associate Wilmar should see less earnings volatility, while higher biodiesel volumes should benefit the company. Other calls are maintained, namely OUTPERFORM on GENP (TP: RM10.75); MARKET PERFORM on SIMEPLT (TP: RM5.90), IOICORP (TP: RM5.15), KLK (TP: RM25.75), FGV (TP: RM2.00), TSH (TP: RM1.60), HSPLANT (TP: 2.30), TAANN (TP: RM3.70), UMCCA (TP: RM6.80), CBIP (TP: RM1.75), SAB (TP: 4.40) and UNDERPERFORM on IJMPLNT (TP: RM2.00).

Bursa Malaysia’s POC 2018. We attended the Palm & Lauric Oils Price Outlook Conference & Exhibition (POC 2018) hosted by Bursa Malaysia at Shangri-La Hotel in Kuala Lumpur over the last two days. POC 2018 is among the major palm oil industry events providing price outlook for 2018/19. The event was well attended, with c.1,700 participants from across the global oils and fats industry. We returned maintaining our neutral outlook on the industry prospects as our softer price outlook remains intact, should be offset by the consensus increase in regional palm oil production.

Lower average forecast at RM2,515/MT in 2018. Forecasters expected CPO prices to average lower than in 2018, with an average of RM2,515/metric ton (MT) and a narrower price trading range between RM2,200- 2,800/MT. This is 6% lower than the 2017 forecast of RM2,670/MT with a much wider range between RM2,200-3,100/MT. Note that this is more bullish at 5% higher than our forecast RM2,400/MT estimate. With continued palm production growth in 2018, a given, forecasters such as Mr Dorab Mistry (Godrej International) and Mr Thomas Mielke (Oil World) highlighted weather risks in Argentina as a potential catalyst for CPO prices, by way of weaker soy production, which should drive up prices of CPO’s closest competitor soybean oil (SBO). Dr James Fry (LMC International) in the bear camp cited the increased Indian CPO tariff, high MPOB stocks and reinstatement of Malaysian export taxes as negative factors to CPO prices. Analysts largely agreed on production prospects, with most forecasts for Malaysian production at c.20.5m MT (+3% Year-on-Year (YoY)), in line with MPOB’s published forecast and the midpoint of our own expected range of 20.0-21.1m MT.

Still counting on biodiesel. Many key presenters emphasised the importance of Indonesia’s biodiesel policy to control excess supply potential in 2018. Mr Arif Rachmat (TAP Group) projected for Indonesian biodiesel consumption to hit 5.7m kiloliters (kL) (5.0m MT), well exceeding the government target of 3.5m kL (3.1m MT) on the back of higher volumes subsidized as the spread between palm oil and gas oil (POGO) narrows. While Dr. Fry concurred, he also observed that the half yearly announcement of biodiesel production allocation limits the stabilising effect of the mandate system on short-term price swings. He also noted that the second purpose of the fund to subsidise replanting could see weaker performance due to potential land title issues.

Potential bullish case on American weather. Both Mr. Mistry and Mr. Mielke brought up the potential for weather risks in the American continent, with ongoing drought in Argentina now leading to cuts in soybean production estimates, while signs of possible dryness in the US farming regions apparently forming, leading to soy production risks as well. However, on the South East Asian side, Mr. Rachmat and Dr. Fry do not expect to see La Nina forming in 2018, based on weather patterns following previous occurrences of severe El Nino. As such, weather on the SEA side is likely to be favourable for the year.

Maintain NEUTRAL with unchanged FY18E CPO price at RM2,400/MT. While we maintain a near-term positive bias to CPO prices on our expectation of lower inventory in Feb 2018, we expect stocks to resume building up as production enters an uptrend in March. We note that the sharp increase in Indian palm oil tariffs (CPO: 44% from 30%; processed palm oil: 54% from 40%) will likely dampen Indian demand for the next 1-2 months, although we expect to see a reversal prior to major festival seasons in 2H18 to meet consumers’ demand. Nevertheless, weakened demand from a key buyer signals further headwinds for CPO prices in the coming months. As such, we maintain our FY18 CPO price forecast at RM2,400/MT with unchanged 1Q18 CPO price range of RM2,200-2,500/MT based on a SBO discount of USD60/MT and crude oil premium of USD100/MT. Despite the lower CPO price prospect, we maintain our neutral stance on the sector as the price decline should be led by production improvements, particularly in 2H18, thus reducing plantation earnings risks. Of our coverage, we continue to favour PPB (OP; TP: RM19.85) as we expect its associate Wilmar to see lesser earnings volatility on its new Sugar marketing strategy, while the Tropical Oils segment could see a recovery given expectations of stronger Indonesian biodiesel volume.

Source: Kenanga Research - 8 Mar 2018