Maintain neutral: We believe the price weakness will sustain into first quarter of 2019 (1Q19) (arising from high stockpile and absence of positive demand catalyst), and recover from second quarter of 2019 (2Q19) onwards, supported by:
i) the extension of biodiesel mandates in Malaysia and Indonesia,
ii) weak ringgit (against the US dollar), and
iii) potential El Nino development.
The extension of biodiesel programmes in Malaysia (from B7 to B10 effective February 2019) and Indonesia (by extending B20 biodiesel to non-subsidy diesel) will raise crude palm oil (CPO) consumption by up to 2.9 million tonnes per annum, and in turn, reduce combined palm oil stockpile of Malaysia and Indonesia by close to 40% (based on latest reported stockpile figures).
Our economics team projects the ringgit to weaken from an average of US$/RM4.035 in 2018 to US$/RM4.10 to RM4.30 in 2019, on the back of:
(i) continued concerns over Malaysia’s fiscal outlook and sovereign credit rating, and
ii) several external factors, which include modest global economic growth, gradual capital outflow from emerging market economies and uncertainties arising on the trade front.
A weak ringgit (against the dollar) will lend support to CPO price as it translates to better price competitiveness of palm oil against other competing vegetable oils (in particular, soybean oil).
National Oceanic and Atmospheric Administration (NOAA)’s Climate Prediction Centre recently predicted that there is a 90% chance of El Nino forming in 1Q19 (and 60% chance that it will continue into the spring of 2019).
The occurrence of El Nino will likely lend support to CPO prices.
We note that three out of four El Nino events (which happened since 2002) did result in higher CPO prices.
We do not expect palm oil prices to jump significantly higher, due to the absence of significant demand catalyst. Palm oil demand in India (the largest importing country for Malaysia’s palm oil) will likely remain lacklustre.
While the Indian government has recently cut import duties on CPO and refined palm oil (RPO) to 40% and 45% respectively (from 44% and 54% currently), this may not boost India’s demand for palm oil significantly, due to the rupee depreciation and credit crunch.
Besides, we note that the recent plunge in crude oil price will likely deter discretionary biodiesel blending.
In our strategy report (dated Dec 19, 2018), we lowered our 2019 to 2020 average CPO price forecasts by RM200 per tonne to RM2,300 per tonne in 2019, and RM100 per tonne to RM2,400 per tonne in 2020.
Correspondingly, we lowered our financial year 2019 to 2020 core net profit forecasts and target prices (TPs) for plantation companies under our coverage.
Despite the lower TPs, we maintain ratings of all plantation stocks under our coverage, due to the recent share price retracements.
While we believe CPO price has bottomed, we do not expect CPO price to jump significantly higher in the absence of major demand catalyst. — Hong Leong Investment Bank Research, Jan 4