RHB Investment Research Reports

Plantation - Tight Supply Offset by Weak Demand

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Publish date: Fri, 12 Apr 2024, 10:54 AM
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An official blog in I3investor to publish research reports provided by RHB Research team.

All materials published here are prepared by RHB Investment Bank Bhd. For latest offers on RHB Invest trading products and news, please refer to: http://www.rhbinvest.com

RHB Investment Bank Bhd
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  • Top Picks are pure planters Ta Ann, Sarawak Oil Palms, Bumitama Agri, and PP London Sumatra Indonesia. We maintain our NEUTRAL stance on the sector with a tactically positive trading strategy focusing on pure planters, as we continue to expect CPO prices to remain lofty in 1H24 on the back of tight supply and weak demand. Key catalyst would be a strong La Nina in 3Q24.
  • As expected, CPO prices have risen past MYR4,000/tonne and are now at MYR4,300-4,400/tonne. This came on the back of supply tightness for palm oil due to the low output season and the impact of El Nino – as demonstrated by the decline in Malaysian palm oil (PO) inventory levels to below 2m tonnes and stock/usage ratios to below historical levels at end-Feb 2024. The rise was also supported by higher crude oil prices (up 12% in the last two months).
  • We continue to expect Malaysian PO inventory to remain below the 2mtonne mark for the medium term, possibly until 3Q24 as the peak output season starts to ramp up from May/June onwards. In 3Q24, all eyes will be on the potential of La Nina occurring and its strength. Should La Nina eventuate and oilseed crops in the northern hemisphere be affected, we could see prices of other vegetable oils rise – that of soybean, rapeseed, and sunflower – and this would have a knock-on effect on PO prices. This could translate to PO prices staying higher for longer. Our current assumption is for prices to average above the MYR4,000/tonne mark in 1H24, before moderating in 2H24. We make no change to our average CPO price assumptions of MYR3,900/tonne for 2024 and MYR3,800/tonne for 2025.
  • Demand for PO has been relatively lacklustre over the last few months, despite the festive-heavy period in 1H24. This is on the back of increased competition from other vegetable oils, as CPO is now trading at a normal discount of USD154/tonne (vs the normal historical discount of USD100- 150/tonne) to soybean oil (SBO), and at an abnormal premium of USD85/tonne (vs the normal historical discount of USD150-200/tonne) to sunflower oil. With this abnormal pricing pattern, switching activities continue and importing countries prefer to run down their PO stock levels. Should La Nina affect the supply of crops in the northern hemisphere, prices of other oilseeds and oils like soybean, sunflower, and canola would rise and PO should begin to look more attractive again.
  • Maintain NEUTRAL with a tactically positive trading strategy. We continue to advocate for smaller-cap purer planters to ride the current spike in CPO prices, given their higher sensitivity to price movements. Our regional Top Picks remain Sarawak Oil Palms, Ta Ann, PP London Sumatra Indonesia, and Bumitama Agri.

As expected, CPO prices have risen past MYR4,000/tonne and are now at MYR4,300- 4,400/tonne. This came on the back of supply tightness for palm oil due to the low output season and the impact of El Nino – as demonstrated by the decline in Malaysian palm oil (PO) inventory levels to below 2m tonnes and stock/usage ratios to below historical levels at endFeb 2024. This was also supported by higher crude oil prices (up 12% in the last two months).

We continue to expect Malaysia’s PO inventory to remain below the 2m-tonne mark for the medium term, possibly until 3Q24, as the peak output season starts to ramp up from May/June onwards. In 3Q24, all eyes will be on the potential of La Nina occurring and its strength. Should La Nina eventuate and oilseed crops in the northern hemisphere be affected, we could see prices of other vegetable oils rise – ie that of soybean, rapeseed, and sunflower – and have a knock-on effect on PO prices. This could translate to PO prices staying higher for longer. Our current assumption is for prices to average above the MYR4,000/tonne mark in 1H24, before moderating in 2H24. We make no change to our average CPO price assumptions of MYR3,900/tonne for 2024 and MYR3,800/tonne for 2025.

While El Nino is expected to last until Apr/May 2024, the probability of La Nina occurring in 3Q24 is now at 74%, according to the US National Oceanic & Atmospheric Administration (NOAA). We highlight that, since the last “triple-dip” years of La Nina in 2020-2023 were moderate events, there is a chance that 2024’s La Nina could be strong. While its impact on oil palm production is not normally significant, we saw the last three consecutive years of La Nina having an impact – including extreme rainfall and flooding in Australia, prolonged drought in Africa, and the exceptional drought in the southwest region of the US. We will, therefore, need to monitor the severity of La Nina and its impact on other crops.

Demand for PO has been relatively lacklustre over the last few months, despite the festivalheavy period in 1H24. This is on the back of increased competition from other vegetable oils, as CPO is now trading at a normal discount of USD154/tonne (vs normal historical discount of USD100-150/tonne) to SBO, but at an abnormal premium of USD85/tonne (vs normal historical discount of USD150-200/tonne) to sunflower oil. Should La Nina affect the supply of crops in the northern hemisphere, prices of other oilseeds and oils like soybean, sunflower oil and canola would rise and PO should begin to look more attractive again. 

Inventory being run down instead of restocking. With this abnormal pricing pattern, switching activities continue and importing countries prefer to run down their PO stock levels. As at end-February, PO stock levels in China, India, and Pakistan were at 15%, 13.4%, and 1.3% below historical levels, while Bangladesh’s was 12% above. This price abnormality may only be reversed if the weather in the northern hemisphere turns for the worse and supply prospects weaken.

We also highlight that the buying preference for PO remains tilted towards Indonesian PO, as seen by Malaysia’s 2023 export decline of 3.9% and Indonesia’s export increase of 4.3% over the same period. Malaysia continues to lose market share to Indonesia due to Indonesian PO’s more attractive pricing – given the higher export tax and levy of 14.8% currently vs Malaysia’s 8%. 

Longer-term demand, however, remains intact – with the continued growth of mandated biofuel in Indonesia, Brazil, and the US and the possibility of new uses for vegetable oils in the form of aviation and maritime fuel. In Indonesia, assuming there is no change to the biodiesel mandate, the full-year B35 mandate should include a 14% YoY rise in CPO usage in 2024, which will take up an additional 1-1.5m tonnes of CPO. Discretionary demand, however, is not expected to make a comeback, given the still-negative gap between CPO and gasoil prices of USD10.59/bbl (USD76/tonne).

Overall, stock/usage ratios are expected to remain above historical averages for 2024F. After taking into account the supply and demand scenario above, we highlight that Oil World is still forecasting decent output growth of 3.4% YoY for global oilseeds in 2024, while global vegetable oil is expected to grow at a smaller 1.8% YoY. We highlight that projected stock/usage ratios for all the oilseed and vegetable oil composites, except for PO and SBO, are expected to be higher than the 20-year historical averages in 2024F. This means we are not in a dire position in terms of supply-demand dynamics, and vegetable oil prices may be less volatile this season.

Recommendation

Maintain NEUTRAL on the sector, with a tactically positive trading strategy. We continue to advocate for smaller-cap purer planters to ride the current spike in CPO prices, given their higher sensitivity to price movements. Our regional Top Picks remain Sarawak Oil Palms, Ta Ann, PP London Sumatra Indonesia and Bumitama Agri.

Risks

The main downside risks to our outlook include:

i. The Russia-Ukraine war being prolonged and exacerbated;

ii. Significant changes in the crude oil price trend, which may result in changes in biodiesel mandates;

iii. Weather abnormalities resulting in an oversupply or undersupply of vegetable oils;

iv. Significant changes in the demand for vegetable oils, caused by changes in economic cycles or price dynamics; v. Worsening labour situation in Malaysia causing production to be affected negatively;

vi. Revision in Indonesia’s tax structure and trade policies;

vii. More ESG issues pinpointed for listed companies.

Source: RHB Securities Research - 12 Apr 2024

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