Despite  the  short-term  CPO  price  weakness,  we  believe  the  plantation sector’s  outlook  has  improved  given  recent  developments.  These include  the  constrained  supply  from  Indonesia,  cheaper  fertiliser  price for next year and the development in Indonesia’s  mandatory  biodiesel policy.  Stronger  global  economic  growth  next  year  is  a  plus  but  this needs to be sustained to help drive an uptrend in the sector.  
- Short  term  weakness  beckons.  We  expect  to  see  some  short-term palm  oil  price  weakness  as  inventory  rises  along  with  the  peak production months. This is especially so with Malaysia’s September palm oil  shipments  rising  by  just  1%  m-o-m  while  production  tends  to  rise  by 5%.  

- 2014  outlook  brightens.  There  has  been  some  positive  developments in  the  sector  which  improves  the  outlook  for  next  year.  Other  than  the stronger economic backdrop, CPO production has been disappointing for most  Indonesian  producers  -  which  alleviates  concerns  about  high inventory  and  fertiliser  prices  easing,  thereby  lowering  input  costs  for next  year.  The  Indonesian government’s move to push for  mandatory biodiesel  implementation  is  gaining  traction  after  state-owned  oil 
company  Pertamina  opened  tender  for  6m  tonnes  of  biodiesel.  Foreign oil companies like Shell Indonesia Shell and PT Total Oil Indonesia have also been mandated to use biodiesel.   

- Biodiesel  support.  We view Indonesia’s  biodiesel  implementation  as key  in  limiting  the  downside  for  palm  oil  price  on  a  sustained  basis.  As Indonesia’s palm oil  production  only  grows  by  <3m  tonnes  in  a  good year,  taking  out  3m  tonnes  for  conversion  to  biodiesel  implies  that  the country will have less palm oil to export - which is price-positive.  

- Indonesia’s 100k  ha  ownership  limit.  The  ownership  limit  for  oil palm plantation moves closer to materialisation after the Minister of Agriculture H.  Suswono  approved  revisions  made  to  regulations.  Nevertheless, there is no retrospective effect and most companies have enough “ijin lokasi”  (location  licenses)  to  last  several  years  of  expansion.  Clarity  on the issue should improve and remove an element of uncertainty. 

Source: RHB