- According to news reports, Indonesia and Malaysia will take steps to boost CPO prices. The two countries have agreed to set up a supply mechanism to stabilise CPO prices.
- In a news report, Malaysia’s Plantation Industries and Commodities Minister was quoted as saying that there were two possibilities in Malaysia’s cooperation with Indonesia. First, reducing palm oil expansion in Indonesia. Second, increasing palm oil usage and consumption in Malaysia by promoting biodiesel usage.
- The Minister was also cited as saying that the Malaysian Cabinet will be discussing the changes on palm oil export tax structure next Friday.
- We view these developments positively. We reckon that the measures would have to be implemented as soon as possible to alleviate any concerns about rising inventory and slowing demand.
- Without the tax-free CPO export quota, the implementation of the export tax rate would lower the effective CPO prices realised by companies. However, we are of the view that it would be positive as it would help move excess supply out of the country. Nevertheless, we believe that if the export tax rate were lower than the proposed 8% to 10%, then it would benefit upstream players more.
- As for restricting palm oil expansion in Indonesia, we reckon that this would help support CPO prices in the longer term. Large plantation companies in Indonesia, for e.g., Golden Agri Group, have new planting targets of more than 10,000ha annually. The downside from this is that a smaller increase in mature areas would mean softer volume growth of FFB production for the planters in the future.
- The B5 biodiesel programme has already been rolled-out in the Central Region since arlyNovember 2011. The B5 Fuel Usage Programme was supposed to be implemented nationwide by 2014F.
- For the B5 biodiesel programme to be effective, we believe that the nation-wide rollout would have to take place immediately. Assuming the programme absorbs about 300,000 tonnes of palm oil, this would be roughly 1.6% of Malaysia’s full-year production in 2012F.
- We remain positive on the plantation sector. We expect CPO prices to recover underpinned by the large price discount to soybean oil and a low output season in November and December.
Source: AmeSecurities
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