Sector update:
Plantation (Neutral)
Last Round Of El Nino Impact for Malaysia
Plantation (Neutral)
Last Round Of El Nino Impact for Malaysia
CPO
production in Malaysia, facing the last round of El Nino impact, is only
expected to see a strong improvement post 1Q17. This is contrary to Indonesia,
which is already seeing a significant turnaround in productivity since 4Q16.
Thus, inventory fell back to 1.54m tonnes in January as exports remained lacklustre.
We expect inventory levels to remain range-bound between 1.5m and 1.9m tonnes
for the next few months. We keep our NEUTRAL sector weighting, with regional
Top Picks of KLK, Sime Darby, Golden Agri and London Sumatra.
¨ Malaysia’s CPO
production fell 13.4% MoM in January, but was up 13% YoY. We expect
Malaysia’s CPO output to only recover strongly post 1Q17.
¨ Exports rose 1.2% MoM
in January,
ie barely changed YoY. Exports to China grew 5.2% MoM, partly offset by a 15.4%
decline in exports to India. We expect demand from India to improve once the
currency demonetisation effect wears off, while we expect China’s demand to
remain weak from high domestic stockpiles.
¨ Inventory fell 7.6%
MoM to 1.54m tonnes
in January from lower output, bringing the stock/usage ratio to 8.7% (Dec:
8.9%), vs the 12-year average of 10%. Over the next few months, as production
remains weak and exports remain lacklustre, inventory should remain
range-bound, ie 1.5-1.9m tonnes.
¨ Recent developments:
i. Soybean prices moderated 10% from its high in
mid-December from an improvement in soybean crop prospects in Argentina, as
floods have receded. Still, floods would have already impacted Argentina’s
soybean crop, expected to decline 5.4% YoY in 2017. This may be offset by the
bumper crop in Brazil, which is estimated to grow 8% YoY. All in, South
American soybean crop is estimated to rise 5.3% YoY.
ii. US president Donald Trump has ordered the
Environment Protection Agency (EPA) to freeze biodiesel and ethanol compliance
regulations and targets for 2017. This freeze, if continued, may lead to excess
supply for corn and soybean, previously used for biofuel blending. This,
together with the expiry of the USD1/gallon tax credit for biofuel producers in
Dec 2016, may mean lower demand for soybean oil in the US. In 2016, the US
utilised approximately 7-8m tonnes of soybean oil to fulfil its biofuel policy.
iii. China and India’s palm oil imports stiill
weak. CPO
imports in China fell 24.2% YoY in 2016, while edible oil imports fell 18.1%
YoY. India’s palm oil imports fell 12.5% YoY in 2016, due to the continued
impact of the currency demonetisation, while edible oil imports fell 5% YoY.
While demand should improve in 2017 as palm oil stocks are low in China, the
quantum of improvement would depend on the price differential between CPO and
soybean oil, which is at an extremely low USD13/tonne currently.
¨ Still NEUTRAL. We expect the
current strong CPO prices to moderate after 1Q17, as CPO production recovers
more significantly and soybean from South America starts being harvested. We
keep our MYR2,500/tonne CPO price assumption for 2017. Top Picks remain Kuala
Lumpur Kepong (KLK), Golden Agri and London Sumatra. We also like Sime
Darby as a restructuring play.
Kindly click the following link for the full report: Last Round Of El Nino Impact for Malaysia
Hoe Lee Leng
Deputy Director
Regional Head of
Plantations
RHB Securities
Malaysia
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