Plantation Sector - Sabah refiners to impose larger price discount OVERWEIGHT

OVERWEIGHT

• Business Times quoted Joseph Tek, the chief executive officer of IJM Plantations Bhd as saying that Sabah’s palm oil refiners will impose a higher discount to buy cheaper crude palm oil (CPO) beginning next month. 
• Tek said refiners in Sabah are looking at more than double the existing discount of RM40/tonne to a range of RM80 to RM100/tonne of CPO received from millers. The discount is only imposed by Sabah refiners. This action is a result of Indonesia imposing a duty structure more favourable towards refiners since October last year. Refiners in Sabah include IOI Corporation and Wilmar International. 
• This is not positive for upstream players in Sabah as it would result in effective CPO prices realised being less than the spot prices reported by the MPOB (Malaysian Palm Oil Board). Among the upstream players in Sabah, Genting Plantations (GenP) usually enjoys CPO prices which are closest to MPOB’s spot prices. This is partly because the group usually sells most of its CPO at spot instead of forward prices. 
• Assuming GenP realises an average CPO price which is RM100/tonne below MPOB’s spot price, then the group’s FY13F net profit would ease by 3%. However going forward, GenP’s average CPO price realised would be below MPOB’s spot prices anyway as the group’s palm oil division in Indonesia becomes larger. 
• Average CPO price realised by other upstream players are usually RM100-RM200/tonne below MPOB’s spot prices. The price discount of some of the planters is even larger than this range as they sell part of their CPO production forward. For example, Kuala Lumpur Kepong’s average CPO price realised in FYE9/11 was RM2,958/tonne, RM384/tonne below MPOB’s spot price of RM3,342/tonne. 
• There are a few mitigating factors. First, the discount of RM80 to RM100/tonne imposed by the Sabah refiners may not last as the country enters the low output season at the end of the year. In addition, there is the possibility that the high refining margins in Indonesia would not sustain as new refining capacity starts coming on-stream from 3Q2012 onwards. 
• Refining capacity in Indonesia is estimated to expand by 24% this year. According to an executive director of the Indonesian Vegetable Oil Association, installed refining capacity is expected to reach 23mil tonnes by year-end and 25mil tonnes in 2013F. 
• Also recently, Malaysia increased the export quota for tax-free CPO by two million tonnes for this year. Therefore, upstream players could always export their CPO to enjoy higher CPO prices. 
• We remain positive on the plantation sector. We expect CPO prices to continue to recover, underpinned by the large price discount to soybean oil and tight global supply of vegetable oils.

Source: AmResearch