ASEAN Plantations - Rising inventories put a cap on price rise


■ Palm oil stocks rose 3% mom to a new record high of 2.91m tonnes as at end-Nov.

■ We are negative on this, as the stock level is above our and consensus forecasts.

■ This, coupled with recent drop in crude oil price to US$40/barrel, may cap the CPO price rise, fuelled by worries over El Nino impact and rising biodiesel mandates.

■ We expect palm oil stocks to fall 4% mom to 2.8m tonnes at-end Dec and CPO prices to trade at RM2,100-2,500 per tonne for the remainder of the year.

We stay Neutral on the sector and prefer FR, AALI and GENP for exposure.

Larger palm inventories due to rising imports and lower exports
Palm oil stocks in Malaysia jumped 3% mom and 28% yoy to 2.91m tonnes as at endNov to a new record high. The stock level was 2-3% ahead of our and consensus (Bloomberg and Reuters) forecasts of 2.84m-2.85m tonnes due mainly to higher-than-expected imports and weaker exports. Palm oil imports unexpectedly rose 66% mom in Nov due mainly to a surge in imports of processed palm products from Indonesia.

Higher stockpiles and weak exports are negative for CPO prices
We view the larger-than-expected palm oil stockpile and the 36% drop in palm oil exports for the first 10 days of Dec versus Nov to be negative for near-term CPO prices. The good news is that the CPO price discount to soybean oil has widened to US$184 per tonne currently from US$108 per tonne, a month ago, improving palm oil’s competitiveness against other soya oils.

Indonesia biodiesel and El Nino concerns are key support factors
The higher palm oil stockpiles are partially offset by concerns over:

(1) possible disruption to palm oil supplies in 1H16 due to the lower rainfall experienced in key palm oil regions;

(2) rising biodiesel mandates in Indonesia, the US and Argentina, which would boost consumption; and

(3) dryness in key soybean planting regions in Brazil.

Price support for CPO prices falls in line with lower crude oil
The recent fall in Brent crude oil price to US$40 per barrel is negative for CPO prices, as it would make biodiesel less viable economically and lower the CPO-biodiesel breakeven support price to RM1,151 per tonne (with no subsidies) and RM2,032 (with subsidies from Indonesia CPO fund, assuming 90% of fund allocated for biodiesel subsidy).

Palm oil stocks projected to fall by 4% mom at end-Dec
Our initial tentative estimates suggest that palm oil stocks may decline by 4% mom in Dec to 2.8m tonnes. Production and exports are projected to fall by 15% and 10% mom, respectively, due to seasonal factors.

Maintain Neutral rating and top picks
We expect near-term CPO prices of RM2,100-2,500 per tonne and lower our average CPO price forecast to RM2,150 per tonne (from RM2,230) for 2015 but maintain RM2,450 for 2016. We maintain our Neutral sector rating, with a preference for First Resources (FR), Astra Agro (AALI) and Genting Plantations (GENP). (Read Report)

Read Related Reports
1) Malaysia Palm Oil Sector - Tree stress has set in; Indonesian palms are likely more stressed than Malaysian ones by Credit Suisse Asia Pacific Equity Research, published on 11 December 2015

2) Regional Plantations - Red flag by Malaysian refiners by Maybank Kim Eng Research, published on 11 December 2015

Source : CIMB Research

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