Sector Update:
Plantation
Cautious Mode On
Plantation
Cautious Mode On
Despite the weak CPO
output numbers in June which we expect to continue in July, we believe CPO
prices would remain weak over the next quarter. This is on the back of the
still strong supply coming onstream not only from palm oil, but also from
soybean and rapeseed in 2H17F and the relatively lacklustre demand dynamics. We
expect inventory levels to continue its climb from August, once productivity
starts to climb on the back of the seasonal peak period. No change to our
UNDERWEIGHT sector call and our MYR2,600/tonne CPO price assumption for 2017.
¨ 3Q17F outlook. We continue to expect
CPO prices to be remain weak over the next quarter. This is as CPO supply heads
towards the peak season in 2H17F. This, in combination with the:
i. 4.7% increase in
rapeseed output coming out of EU;
ii. 10% increase in
soybean crop coming out of the US;
iii. 12.5% increase in
soybean crop coming out of South America;
…would result in
surpluses of the overall 17 oils and fats composite of 6m tonnes and eight
vegetable oil complex of about 7m tonnes in the 2017 crop year.
¨ Demand still
lacklustre. On
the demand front, although we have seen improvements in demand from China, this
is offset by the still relatively weaker demand from India. We expect this
could be exacerbated by another potential change in import duties in India. In
addition, newly proposed changes by the US to the Renewable Fuel Standard (RFS)
would reduce the original volume of biomass-based biodiesel by 20%, resulting
in lower usage of soybean oil for biodiesel.
¨ Malaysia’s CPO
production fell 8.5% MoM in June. Although we had expected production to
decline due to the onset of the fasting month, the decline in production was
higher than expected. YTD, production climbed 14.8% YoY. In July, production is
likely to continue to be weak, due to the festive Aidil Fitri period
where the workers go on holiday. For the whole of 2H17F, we expect Malaysia’s
CPO output growth to moderate to end the year with a 10-12% growth YoY in 2017.
¨ Exports fell by a
similar 8.4% MoM in June, post the Aidil Fitri festive ramp-up the month
before. This brought YTD exports to a 7.3% rise YoY. In YTD-June, exports to
China rose 13.4% YoY while EU saw a 3.9% increase but this was offset by a 22%
YoY decline to India and 18% drop to the US.
¨ Inventory fell 2% MoM
to
1.527m tonnes in June due to the weaker output. Given our expectations that
output is likely to continue to be weak in July, we expect stock levels to
remain flattish next month. Subsequently, we would expect to see a continuation
of rising inventory levels, as production resumes its recovery during the peak
seasonal period.
¨ Maintain UNDERWEIGHT, on the back of a strong output recovery and weak demand dynamics. Catalysts include a positive change to global demand and any extreme weather occurrences that would have an impact on global vegetable oil output. Our Top BUY is Sime Darby while our Top SELL is London Sumatra.
Kindly click the following link for the full report: Plantation: Cautious Mode On
Best regards,
¨ Maintain UNDERWEIGHT, on the back of a strong output recovery and weak demand dynamics. Catalysts include a positive change to global demand and any extreme weather occurrences that would have an impact on global vegetable oil output. Our Top BUY is Sime Darby while our Top SELL is London Sumatra.
Kindly click the following link for the full report: Plantation: Cautious Mode On
Best regards,
Hoe Lee Leng
Deputy Director
Regional Head of
Plantations
RHB Securities
Malaysia
DID: (603) 9207
7605
Hariyanto Wijaya, CFA, CFP, CA, CPA, CFTe, CMT
Vice President
Research Analyst – Heavy
Equipment, Coal, Plantation
PT RHB Sekuritas
Indonesia
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