■ The haze is gone. Heavy rain is forecasted till year-end.
■ Record high palm oil stockpile, low crude oil price and weak global economy keep near term El Nino optimism in check.
■ Stay NEUTRAL for now but position for an El Nino trade in 1H16. El Nino is a situational play, not structural.
The strong 2015 El Nino is taking a breather as the Northeast monsoon arrived in late Oct 2015 and hotspots in the region are almost gone by now. The monsoon is also expected to bring heavy rainfall to the region in Dec 2015-Jan 2016. This is despite indicators showing that the current El Nino could last till May 2016 (see Appendix 1). In terms of anomaly, Sabah is anticipated to receive below-average rainfall this year end.
Irreversible damage has been done in parts of Kalimantan (especially Central & South Kalimantan), Jambi and South Sumatra where it was especially dry in Aug-Oct 2015 as shown by rainfall barcharts in Fig 7a-7c, and the regional hotspot density maps in Fig 8a-8d. In Malaysia, the Sabah state was particularly dry in 1H15. The affected areas in the region accounts for 42% of total planted area and 39% of total production in 2014 (see Fig 9).
Least affected by 2015’s El Nino are companies with estates in Peninsular Malaysia and Sarawak, namely TAH (BUY), SOP (BUY), THP (HOLD), BPLANT (BUY), FGV (HOLD), UPL (Not rated), and SIME (HOLD). Although FR (HOLD) has 67% of its planted area in Riau, we gather that it has not suffered much rain deficit there.
In 1997-98, the strong El Nino resulted in a 16% YoY decline in Malaysia’s FFB yield to 16.0t/ha in 1998 – see Fig 11 & 12, but only down 8% YoY in absolute terms (as new areas come into maturity). In Ringgit Malaysia term, CPO price jumped 75% YoY to average MYR2,378/t in 1998. Stripping aside Asian financial crisis impact on Ringgit, CPO price in US Dollar was only up by 23% in 1998.
What’s Our View
We view El Nino as a situational play in 1H16 and not structural. Record high palm oil stockpile, low crude oil price and weak global economy will counter El Nino optimism in the next 1-2 months, until low crop season kicks-in in 1Q. We maintain that CPO price will likely peak sometime in Mar-May 2016. While it is still premature to discuss La Nina at this juncture, it is worthwhile to be reminded that almost immediately after El Nino, La Nina came back in 1999. This boosted Malaysia’s FFB yield by 21% YoY in 1999 and CPO production rebounded strongly by 27% YoY. What follows was a 39% (in Ringgit) / 35% (in US Dollar) slump in CPO prices. Trade cautiously amidst weak underlying global economy. Our BUYs in the region are GENP, SOP, TAH, BPlant and AALI. (Read Report)
Source : Maybank Kim Eng Research