Higher palm oil demand on global economic growth

This article first appeared in The Edge Financial Daily, on March 6, 2018.
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Plantation sector
Maintain positive: India raised the import duties on crude and refined palm oil. India raised the import duty on crude palm oil (CPO) to 44% while the duty for refined palm oil was raised to 54%. Previously, the CPO import duty was at 30% and the refined palm oil at 40%. We gather that the import duty for other vegetable oils such as soybean oil and rapeseed oil remains unchanged. The increase in the import duties was aimed at improving farmer income in India. As the difference of the import duty between CPO and the refined palm oil stays at 10%, the local refineries in India do not benefit much. Lastly, we expect the cooking oil price to increase in India.

Expect negative impact on CPO price in the short term. Effectively, the all in duty on CPO (inclusive of 10% surcharge) is estimated to be 48.4%. As for refined palm oil, the effective duty is estimated to be 59.4%. As the increase is targeted only at palm oil, we do expect India to boost its purchase of soybean oil and rapeseed oil as the import duty on these oils is lower as compared to palm oil. Hence, the immediate impact will be negative impact on CPO price due to reduced demand for palm oil from India.

Things should normalise after two months as India consumption is only 11% of oils and fats globally. We believe that the news should result in higher price for soybean oil and rapeseed oil globally in the near term as India increases its purchase. As a result, the discount between palm oil against soybean oil and rapeseed oil is expected to increase. In the long run, this will improve the competitiveness of palm oil against soybean oil and rapeseed oil and hence increase the demand for palm oil in other major consumer countries such as China, European Union, United States and Pakistan. Overall, the impact on palm oil is expected to be neutral in the long run as the demand for palm oil is still resilient due to its price competitiveness in the global vegetable oil market. While India is a major consumer of oils and fats globally (annual consumption of around 24 to 25 million tonnes), its total share of the global market is estimated to be only 11%. Hence, the demand from the other 89% is expected to remain intact.

We maintain our positive view on the sector. We reiterate our positive view on the sector due to improved demand outlook for palm oil in 2018. We believe that the good global economic growth in 2018 should lead to higher consumption per capita. On the supply side, consensus estimate of huge supply growth may not be fully realised due to ongoing labour shortage and the potentially high replanting activity in Indonesia. Note that Indonesia plans to replant up to 165,000ha of oil palm plantation land this year. This could limit the supply surge by between 0.5 to 0.6 million tonnes assuming oil yield of 3.5 megatonne (MT) per ha.

Top pick is IOI Corp. IOI Corp has recently completed its disposal of 70% stake in Loders Croklaan. Hence, we expect the special dividend (estimated at 13.0 sen) to be announced in the next 6 months. Post the disposal, we also expect margin improvement at the Group level and substantial improvement in the Company’s balance sheet. Other buy calls are KLK, PPB, GENP, TSH and FIMACORP. — MIDF Research, March 5