Maintain neutral: The Cabinet approved the implementation of B7 biodiesel programme on Tuesday, to be carried out in stages beginning November, according to the Plantation, Industries and Commodities Ministry. This long-awaited development is certainly positive and we see it helping to ramp up domestic consumption and potentially reducing petrol subsidies. However, we doubt its viability at the current crude oil price, which has fallen by more than 15% over the last two months. We maintain our “neutral” call on the plantation sector due to the lack of short-term catalysts.
Plantation Industries and Commodities Minister Datuk Amar Douglas Uggah Embas said the B7 programme will be implemented in Peninsular Malaysia from Saturday and in Sabah, Sarawak and Labuan by December. Under the B7 programme, 7% of palm oil methyl ester will be added to diesel. This is expected to see the consumption of 575,000 tonnes of biodiesel, contributing to savings of 667.6 million litres of diesel a year. However, we doubt it will be viable at this stage as the crude oil selling price is even cheaper than the cost of processing biodiesel.
Indonesian palm oil exports declined by 1.6% to 1.69 million tonnes for September compared with the previous month. Year-to-date, it was down 1.75%, mainly due to the weak demand from China and India. India was affected by: (i) a higher import tariff for crude palm oil (CPO); (ii) weakened rupee against the US dollar; and (iii) India’s inflation. China’s weak demand was due to the increased difficulty in obtaining bank loans and a switch of demand for vegetable oils.
We expect stiffer competition for Malaysia’s exporters starting this month as Indonesia has also adopted a zero export tax policy as October’s reference price of US$640 (RM2,093) per tonne fell below the minimum price of US$750 per tonne.
We see muted outlook for the upcoming results though the average CPO price for the third quarter of the year was 5% weaker (RM2,212 per tonne against RM2,344) compared with last year.
The relatively lower selling price should be cushioned by stronger fresh fruit bunch production as most planters have registered impressive production growth, especially Genting Plantations Bhd and Ta Ann Holdings Bhd. Others have shown production growth of 3% to 10% year-on-year. — Public Investment Bank Bhd, Oct 29
This article first appeared in The Edge Financial Daily, on October 30, 2014.