Plantations - The temporary tussle for CPO
Recommendation: Neutral
Malaysian palm oil inventories fell 2% mom to a 7-month low of 1.74m tonnes as at end-Feb 15. We view this as a slight negative as the inventory is above our and consensus estimates. However, the main surprise for us was the sharp drop in FFB yield (-22% mom and 21% yoy) recorded by Sabah estates to the lowest monthly level since 2001. We believe that the weak palm oil production has been the key supportive factor for CPO prices in Jan-Feb. However, this could be temporary as supply is expected to trend higher from 2Q15 onwards. As such, higher CPO exports, in our view, will become a more critical factor in the coming months. Our Neutral sector stance and top picks – First Resources, AALI and SIMP – are intact.
What Happened
Palm oil stocks in Malaysia fell 2% mom to 1.74m tonnes as at end-Feb. This is 2% and 4% above our and consensus estimates, respectively. FFB production fell 3% mom and 12% yoy due to lower FFB yields achieved by the East Malaysian estates. Palm oil exports remain poor due to weaker biodiesel demand and narrower CPO price discount vs. soyoil and other edible oils.
What We Think
We view this news as a slight negative as the palm oil inventory is larger than expected. However, the main takeaway from the palm oil statistics is the sharp fall in production from estates in Sabah, the largest producer and highest yielding palm oil state in Malaysia. We suspect that it could be due to a combination of erratic weather, biological tree stress, lack of harvesters for tall palms and ageing estates. We believe the lower production is the key supportive factor for CPO prices in the past few months. However, Malaysia palm oil output is expected to trend higher in the coming months due to improved weather conditions and seasonal factors. As such, the current strength in CPO prices may not last unless palm oil demand starts to pick up in the coming months to keep palm oil stocks manageable. We think the factors that will come into play in determining CPO prices in the coming months will be (1) the El Nino impact on global weather; (2) strength of the recovery in palm oil supply; (3) Indonesia domestic biodiesel consumption; and (4) crude oil prices. For March 2015, we project that palm oil stocks will fall 1% mom to 1.72m tonnes.
What You Should Do
We maintain our average CPO price forecast of RM2,460 per tonne for 2015 and advise investors to be selective in their stock picks. Under our coverage, we favour First Resources, AALI and SIMP.
Source: CIMB Daybreak - 11 March 2015
Recommendation: Neutral
Malaysian palm oil inventories fell 2% mom to a 7-month low of 1.74m tonnes as at end-Feb 15. We view this as a slight negative as the inventory is above our and consensus estimates. However, the main surprise for us was the sharp drop in FFB yield (-22% mom and 21% yoy) recorded by Sabah estates to the lowest monthly level since 2001. We believe that the weak palm oil production has been the key supportive factor for CPO prices in Jan-Feb. However, this could be temporary as supply is expected to trend higher from 2Q15 onwards. As such, higher CPO exports, in our view, will become a more critical factor in the coming months. Our Neutral sector stance and top picks – First Resources, AALI and SIMP – are intact.
What Happened
Palm oil stocks in Malaysia fell 2% mom to 1.74m tonnes as at end-Feb. This is 2% and 4% above our and consensus estimates, respectively. FFB production fell 3% mom and 12% yoy due to lower FFB yields achieved by the East Malaysian estates. Palm oil exports remain poor due to weaker biodiesel demand and narrower CPO price discount vs. soyoil and other edible oils.
What We Think
We view this news as a slight negative as the palm oil inventory is larger than expected. However, the main takeaway from the palm oil statistics is the sharp fall in production from estates in Sabah, the largest producer and highest yielding palm oil state in Malaysia. We suspect that it could be due to a combination of erratic weather, biological tree stress, lack of harvesters for tall palms and ageing estates. We believe the lower production is the key supportive factor for CPO prices in the past few months. However, Malaysia palm oil output is expected to trend higher in the coming months due to improved weather conditions and seasonal factors. As such, the current strength in CPO prices may not last unless palm oil demand starts to pick up in the coming months to keep palm oil stocks manageable. We think the factors that will come into play in determining CPO prices in the coming months will be (1) the El Nino impact on global weather; (2) strength of the recovery in palm oil supply; (3) Indonesia domestic biodiesel consumption; and (4) crude oil prices. For March 2015, we project that palm oil stocks will fall 1% mom to 1.72m tonnes.
What You Should Do
We maintain our average CPO price forecast of RM2,460 per tonne for 2015 and advise investors to be selective in their stock picks. Under our coverage, we favour First Resources, AALI and SIMP.
Source: CIMB Daybreak - 11 March 2015
