Plantations - Record CPO stockpile vs. Indonesia drought


■ Malaysia’s Oct palm oil stocks seen climbing 3% mom to 2.72m tonnes. 

■ Palm oil output in Oct projected to exceed exports and domestic consumption. 

■ Indonesian planters sounding alarm on potential shortfall in 2016 CPO output. 

■ CPO price expected to stay range-bound to pare down stocks and could rally in 1Q16 when inventories are reduced due to weaker CPO output from Indonesia 

Maintain Neutral with GENP, AALI and First Resources as our preferred picks.
Another record palm oil stockpile in Oct? 
Findings from a survey of 24 Malaysian planters by the CIMB Futures team revealed that Malaysian CPO output fell 0.9% mom to 1.94m tonnes in Oct 15. Palm oil exports fell by 2.7% mom, based on export statistics released by cargo surveyors. Overall, we estimate that Malaysian palm oil inventories could have climbed 3% mom to an all-time high of 2.72m tonnes at end-Oct 15.

Lower Oct production is broadly in line with historical trend 
We are not surprised by the 1% mom drop in Oct production, which is in line with the historical seasonal palm oil output trend in Malaysia. Our survey revealed that Peninsular Malaysia estates posted the biggest drop in output of around 7.5% mom, followed by Sarawak which registered a 1.1% decline in output. Sabah estates, on the other hand, saw a 6% mom increase in production.

Exports fell despite festival demand ahead of Diwali
We estimate Malaysian palm oil exports fell by c.2.7% mom, based on estimates from cargo surveyors Intertek (-2.4% mom) and SGS (-3% mom) despite anticipated stronger demand from India due to the Diwali festival. This could be due to palm oil import controls by Malaysia as well as weaker demand from China and EU.

El Nino causing Indonesia’s drought and haze in SEA
Indonesian estates recently experienced one of the worst drought in their history, which also contributed to the severe haze experienced in SEA regions. However, planters view on the potential impact on palm oil output varies. EHP expects to record higher production in 2016 despite lower rainfall, while Indofood Agri indicated that production could drop by as much as 20% in 1H16 in the worst case scenario due to the drought.

How Indonesia drought could impact future stockpile
CPO price has jumped 16% over the past two months to US$560 (RM2,143) per tonne due to market concerns over the prolonged drought impact on FFB output in 2016. However, CPO price upside is capped by the current high palm oil and soybean stocks. Our rough calculations suggest that Malaysian stocks could fall below 2m tonnes by 2Q16, due to lower Indonesian production in 1Q16.

We expect CPO price to remain range-bound in the near term
We project CPO price to remain range-bound at RM2,100-2,500 in the near-term, and we maintain our average CPO price forecasts of RM2,230 for 2015, RM2,450 for 2016 and RM2,600 for 2017.

Our key picks to leverage on rising CPO price
Plantation companies that derive a larger portion of their earnings from Malaysian estates and have strong management will most likely see their palm oil productions being least impacted by the rainfall deficits, and they will also benefit from the higher palm oil prices. Taking this into consideration and the valuations of the planters, our top picks are Genting Plantations, First Resources and Astra Agro. (Read Report)

Source : CIMB Research

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