The general tone of Palm Oil Conference (POC) 2014 was bullish. Many speakers highlighted biodiesel demand and weather issues as the main drivers  of  CPO  price’s current  rally.  Most  of  them  believe  there  is  still upside  potential  for  CPO  prices,  with  projections  of  prices  reaching MYR3,000/tonne by mid-2014. This reinforces our OVERWEIGHT stance on the sector.

A  bullish  overtone.  The  general  tone  of  Palm  Oil  Conference  (POC) 2014 was bullish, with many speakers referencing biodiesel demand and weather issues as the main drivers of the current CPO price rally. Of the seven price forecasts put forth, six were relatively bullish, while one was neutral.  Most  speakers  believe  there  is  still  upside  potential  for  CPO prices, with projections of MYR3,000/tonne being reached by mid-2014. Should  El  Nino  occur,  most  speakers  believe  that  this  may  drive  prices beyond MYR3,000/tonne.

Views aligned with our forecasts. Overall, most of the speakers’ views align  with  our  projection  that  CPO  prices  could  hit  close  to MYR3,000/tonne  during  1H2014  on  the  back  of  tight  supply  conditions and  rising  biodiesel  demand  in  Indonesia.  Their  views  also  concur  with ours  that  Indonesian  biodiesel  demand  is  a  game  changer  and  major price catalyst,  while  the  development  of  El  Nino  would  extend  the  price uptrend.  Our  CPO  price  assumption  of  MYR2,700/tonne  for  CY14  and MYR2,900/tonne for CY15 have not factored in impact of El Nino.

Overweight maintained. We maintain our OVERWEIGHT stance on the sector.  We believe this is still  the early stage of a bull market as funds have  just started  to  flow  into  the  palm  oil sector,  and  valuations  remain inexpensive.  Our  top  picks  include  First  Resources  (FR  SP,  BUY,  FV: SGD2.86),  Astra  Agro  Lestari  (AALI  IJ,  BUY,  FV:  IDR29,291),  IOI  Corp (IOI  MK,  BUY,  FV:  MYR5.11),  Golden  Agri  (GGR  SP,  BUY,  FV: SGD0.66) and Jaya Tiasa (JT MK, BUY, FV: MYR2.80).

CPO bulls aplenty

Bullish overtone on POC Day 1.  Out of the four plenary speakers on the first day of the  2014  POC  (Palm  and  Lauric  Oils  Conference),  only  two  made  price  forecasts based  on  fundamental  analyses,  with  one  being  bullish  and  the  other  relatively neutral.  The  general  tone  of the  first day  was  however,  bullish,  with  many  speakers referencing biodiesel as the main driver of the current CPO price rally. 

Tan  Sri  Datuk  Yusof  Basiron,  CEO  of  the  Malaysian  Palm  Oil  Council  (MPOC), projected  that  CPO  prices  will  range  between  MYR2,600-3,000/tonne  for  the  rest of the  year.  The  premise  of  his  argument  was  that  demand  growth  is  expected  to continue to outstrip supply over the long term on the back of population growth, food security, land scarcity, climate change and food versus fuel issues.   

Harold  Sauthoff,  BASF.  The  second  price  forecast  on  the  first  day  was  from  Mr Harold  Sauthoff  from  BASF,  who  projected  that  CPO  futures  prices  would  range between  MYR2,400-2,900/tonne,  and  average  RM2,620/tonne.  This  rather  neutral forecast  is  based  on  Mr Sauthoff’s belief that there will be a reshuffling of demand flows  during  the  year,  as  there  are  at  least  600,000  tonnes  of  new  fatty  alcohol capacity coming into the market in 2H14 and 1H15, which will likely benefit lauric oils like coconut oil more than CPO.

POC  Day  2:  Mostly  bullish.  Of  the  seven  speakers  who  presented  on  the  second day of POC, only five made price forecasts for CPO or spoke of the direction of CPO prices.  One  speaker,  Mr  Liu  Zhi  Qiang  from  Dalian  Commodity  Exchange,  did  not give  any  price  forecast,  nor  referred  to  any  price  trends  during  his  presentation. Another  speaker,  Ms  Emily  French  from  ConsiliAgra,  had  a  bearish  view  on  the vegetable  oil  market  in  general,  saying  that  the  vegetable  oil  market  is  a  buyer’s market as multiple oils are competing for food and fuel demand. Nevertheless, on the whole, the tone of the second day was more bullish than bearish, with most speakers singling  out  biodiesel  demand  and  weather  issues  as  price  drivers.  Below  we summarise the views of three “star” speakers.

Mr  Thomas  Mielke,  Ista  Mielke,  Oil  World.  Mr  Mielke  said  there  are  three  swing factors  to  look  out  for.  One  is  the  weather,  which  is  a  bullish  factor,  given  the extremely  dry  weather  over  the  last  five  weeks.  If  the  weather  does  not  return  to normal within the next two to three weeks, CPO yield will be affected in 4Q14 and in 2015/6. The second swing factor is biodiesel usage outside of mandates, which is a bearish factor, as such use of CPO in the EU has come to a standstill due to the fact that soybean oil (SBO) is now at a discount to gas oil, thus making this oil cheaper to use. The third swing factor is, of course, biodiesel usage in Indonesia, which is  also the most important factor. Currently, as a result of CPO’s price appreciation, biodiesel is  no  longer  attractive.  The  question  now  is,  how  will  the  Indonesian  Government react  to  this?  Would  it  still  push  through  its  mandate?  Mr  Mielke  believes  the Indonesian  Government  would  only  push  through  70-75%  of  its  mandate,  which would still translate into 2.4m tonnes of production, a tripling of production y-o-y. This will make Indonesia the world’s largest consumer of palm oil.  

Dr.  James  Fry,  LMC International.  Dr  Fry  of  LMC  International  continues  to stand firmly by  his  thesis that  CPO prices  would  be  dictated by  the  price band created by the  use  of  vegetable  oils  in  biofuels.  Assuming  that  Brent  crude  oil  stays  at USD110/barrel,  he  projects  that  by  mid-2014,  CPO  (cif  Rotterdam)  prices  would reach USD1,030/tonne, which is its long run average premium over Brent crude. This translates into just over MYR3,000/tonne. However, he thinks this would be the limit of  the  price  rise,  as  competition  from  other  vegetable  oils  would  prevent  it  from moving up further. His view is premised on the belief that fears about the future are now driving prices and that the current drought will  curb CPO output in 3Q14, with a further adverse impact at the end of 2014. 

Dorab Mistry, Godrej International. The last presentation was from Dorab Mistry of Godrej  International,  who  continued  to  stick  to  the  bullish  view  he  has  held  since March 2013. Mr Mistry believes although incremental global vegetable oil supply and demand numbers look  broadly in balance in 2014 - with demand forecast to rise by 6.5m tonnes and supply projected to go up by 6.8m tonnes - this balance would only be  achieved  towards  the  end  of  the  year,  during  the  July-Sept  period  when  CPO production  is  forecast  to  recover.  Until  July,  global  vegetable  oil  stocks  will  remain very  tight,  he  said.  Mr Mistry’s price assumptions are,  therefore,  based  on  a  Brent crude  oil  assumption  of  USD100-110/barrel  and  a  relatively  stable  US  dollar.  He provided  two  price  forecasts  under  two  different  scenarios  -  one  based  on  normal weather, and one under El Nino conditions, which he believes has a more than 50% chance  of  happening.  Assuming  that  rains  occur  within  the  next  few  weeks  and remain normal for the rest of the year, he believes that CPO could trade up to as high MYR3,000/tonne up to June, after which he expects prices to come down to between MYR2,600-2,900/tonne  from  July-Oct.    In  the  event  El  Nino  develops,  he  believes CPO prices will stay at MYR3,000-3,500/tonne after June, as production would likely be affected from late 2014 onwards.

Most views aligned with our forecasts. All in, most speakers’ views align with ours that  CPO  prices  could  hit  close  to  MYR3,000/tonne  during  1H2014,  fuelled  by  tight supply conditions and rising biodiesel demand in Indonesia. Their stand also concurs with our view that Indonesian biodiesel demand is a game changer and major price catalyst, while the development of El Nino could push up prices further. We maintain our  CPO  price  assumption  of  MYR2,700/tonne  for  CY14  and  MYR2,900/tonne  for CY15,  and  our  OVERWEIGHT  stance  on  the  sector.  Our  top  picks  are  First Resources  (FR  SP,  BUY,  FV:  SGD2.86),  Astra  Agro  Lestari  (AALI  IJ,  BUY,  FV: IDR29,291), IOI Corp (IOI MK, BUY, FV: MYR5.11), Golden Agri (GGR SP, BUY, FV: SGD0.66) and Jaya Tiasa (JT MK, BUY, FV: MYR2.80).  

Source: RHB