■ We attended and were panel speakers at the 11th Indonesian palm oil conference
■ Median 2016 CPO price forecast of RM2,526 is higher than our forecast of RM2,450
■ Bullish factors are lower palm oil supplies (El Nino) and higher biodiesel usage
■ Concerns include competition from soybean oils and lower crude oil price
■ Higher CPO prices are needed to offset lower output and rising costs for planters in 2016. Maintain Neutral. Key picks are FR, AALI and GENP
The CPO fund and future of the palm oil Industry
We attended and were panel speakers at the 11th edition of the Annual Indonesia Palm Oil Conference (IPOC) and 2016 price outlook on 25-27 Nov 2015. This year’s event was themed “The Fund and the Future of the Palm Oil Industry” focusing on the recently set up CPO Fund and its impact on the Indonesian palm oil industry.
2016 CPO price predictions by speakers
Five speakers at the conference predicted that the CPO price will trade in the range of RM2,100 to RM3,091 per tonne. We deduced the mean to be around RM2,526 per tonne. Dr James Fry had the most bullish price forecast based on a strong 2016 El Nino scenario, while Dorab Mistry had the lowest price forecast due to concerns over competition from soybean oils. Dorab was not as bearish on global palm oil supplies, unless a drought returns to the palm oil region in early-2016.
Bullish factors that could drive CPO prices higher
The key bullish factors to watch out for in 2016 are Indonesia’s biodiesel consumption and impact of an El Nino-induced drought. In 2015, the El Nino event affected Indonesian estates more severely (through lower rainfall and haze in Jul-Oct) than those in Malaysia. The global 2016 palm oil supply growth forecasts range from -7% to +4% due to differing views on the El Nino impact. Indonesia targets to consume 5.5m-7m kls of biodiesel via its B20 program. If successful, this will boost CPO prices significantly.
Potential dampeners for CPO price
Concerns were raised that the CPO price rally could be limited by the high global soybean supplies and inventories, which could compete with palm oil for market share of edible oils in 2016 and the low crude oil price which could affect Indonesia’s objective of meeting its ambitious biodiesel target. The market is currently assuming that Indonesia will only achieve 2.5m-3m tonnes of its mandated biodiesel target of 7m tonnes.
Stronger CPO price needed to offset higher costs, lower output
The speakers’ views that CPO prices could rise in 2016 to the median price forecast of RM2,526 per tonne, could boost near-term sentiment on CPO producers. However, the higher price is likely to come at the expense of lower production and higher costs of production in 2016, which will offset some of the positive earnings impacts of the CPO price. As such, we are keeping to our Neutral call on the regional planters. (Read Report)