Plantations - Biodiesel demand risk
Recommendation: Neutral
Malaysian palm oil inventories rose 5% mom to a 21-month high of 2.28m tonnes in Nov, 1% below our and consensus projections. We view this as a neutral event, as this development is in line with our and market projections. We project short-term CPO prices to remain range-bound and supported by the seasonally-lower palm oil output in the coming months, higher biodiesel mandate of 7% in Malaysia, potential El Nino event and upcoming festival restocking activities. However, we are concerned about biodiesel demand risk due to the sharp fall in crude oil prices, which makes biodiesel conversion uneconomical. Our Neutral stance and top picks, First Resources, AALI and SIMP, are intact.
What Happened
Nov palm oil stocks in Malaysia rose 5% mom to 2.28m tonnes, 1% below our and consensus estimates due to lower-than-expected production. FFB production fell 8% mom and 6% yoy as FFB yields achieved by the estates declined due to the impact of drought in 1Q14 and seasonal factors.
What We Think
We view the palm oil inventory figures as a neutral event for CPO prices as this is broadly in line with expectations. However, the higher palm oil stock is likely to put a lid on any near-term upside for CPO prices. On a more positive front, CPO production in Malaysia is likely to decline until Feb 2015. This, coupled with the weaker ringgit, potential El Nino event and the 1.7% rise in palm oil shipments for the first 10 days of Dec, will be supportive of CPO prices in the near term. However, we think that the key downside risks to CPO prices will come from potentially weaker biodiesel demand due to lower Brent crude oil prices (US$66 per barrel), which translates into a lower CPO biodiesel breakeven price of RM1,618 per tonne. For Dec 2014, we project that palm oil stocks in Malaysia will fall 2% mom to 2.2m tonnes due to lower production. We maintain our view that CPO prices will trade in the range of RM2,000-2,500 per tonne for the rest of the year.
What You Should Do
We maintain our average CPO price forecast of RM2,390 per tonne for 2014 and advise investors to be selective in their stock picks. Under our coverage, we favour First Resources, AALI and SIMP.
Source: CIMB Daybreak - 11 December 2014
Recommendation: Neutral
Malaysian palm oil inventories rose 5% mom to a 21-month high of 2.28m tonnes in Nov, 1% below our and consensus projections. We view this as a neutral event, as this development is in line with our and market projections. We project short-term CPO prices to remain range-bound and supported by the seasonally-lower palm oil output in the coming months, higher biodiesel mandate of 7% in Malaysia, potential El Nino event and upcoming festival restocking activities. However, we are concerned about biodiesel demand risk due to the sharp fall in crude oil prices, which makes biodiesel conversion uneconomical. Our Neutral stance and top picks, First Resources, AALI and SIMP, are intact.
What Happened
Nov palm oil stocks in Malaysia rose 5% mom to 2.28m tonnes, 1% below our and consensus estimates due to lower-than-expected production. FFB production fell 8% mom and 6% yoy as FFB yields achieved by the estates declined due to the impact of drought in 1Q14 and seasonal factors.
What We Think
We view the palm oil inventory figures as a neutral event for CPO prices as this is broadly in line with expectations. However, the higher palm oil stock is likely to put a lid on any near-term upside for CPO prices. On a more positive front, CPO production in Malaysia is likely to decline until Feb 2015. This, coupled with the weaker ringgit, potential El Nino event and the 1.7% rise in palm oil shipments for the first 10 days of Dec, will be supportive of CPO prices in the near term. However, we think that the key downside risks to CPO prices will come from potentially weaker biodiesel demand due to lower Brent crude oil prices (US$66 per barrel), which translates into a lower CPO biodiesel breakeven price of RM1,618 per tonne. For Dec 2014, we project that palm oil stocks in Malaysia will fall 2% mom to 2.2m tonnes due to lower production. We maintain our view that CPO prices will trade in the range of RM2,000-2,500 per tonne for the rest of the year.
What You Should Do
We maintain our average CPO price forecast of RM2,390 per tonne for 2014 and advise investors to be selective in their stock picks. Under our coverage, we favour First Resources, AALI and SIMP.
Source: CIMB Daybreak - 11 December 2014
