We attended the
annual Palm & Lauric Oils Conference – Price Outlook (POC) 2013 at
Shangri-la Hotel in Kuala Lumpur recently. Based on the six speakers who presented
their CPO price views, the consensus average was at RM2400 per mt (with the
price bands for 2013 ranging from RM1800 to RM3200 per mt). Among the speakers,
the most bullish estimate came from MPOC CEO as he believes that CPO prices
should trade between RM2500 and RM3200 per mt in 2013 due to his expectation of
a lower Stock-Usage ratio for palm oil by end-2013. In contrast, the most
bearish prediction came from Dorab Mistry, who predicts that CPO prices would
fall below RM2000 per mt in July-Aug 2013. Our average CPO price forecast for
2013 is at RM2500/mt, which is more optimistic than Dorab Mistry as we believe
that CPO prices should increase to about RM2700/mt by Jun before bottoming at
RM2100/mt in the peak production season in Sep-Oct. We believe that the key
variance between our forecast and Dorab’s lies in the price outlook for Brent
crude oil. We reiterate an UNDERWEIGHT rating on the sector given that the consensus
is still estimating an average 2013 CPO price of RM2950/mt, which we think will
lead to more earnings disappointments at least in the next earnings season in
May-2013. We maintain UNDERPERFORM calls on SIME (TP: RM8.82), IOICORP (TP:
RM4.34), KLK (TP: RM19.30), FGVH (TP: RM4.00), GENP (TP: RM7.60), IJMP (TP:
RM2.75) and TAANN (TP: RM2.84) due to the low CPO price outlook. Our MARKET
PERFORM calls are also retained on TSH (TP: RM2.00) and UMCCA (TP: RM6.70). Our
only OUTPERFORM call is on PPB (TP: RM15.00) as we expect it to benefit from
Wilmar’s earnings recovery from the turnaround in its soybean crushing and a
better outlook for its palm oil downstream.
Consensus CPO price
close to RM2400 from POC 2013 speakers. Based on the six speakers who
presented their CPO price views during the conference, their forecasts for
2013, range from RM1800 to RM3200 per mt. The average CPO price forecast of
RM2398 per mt this year was lower by 23% YoY (against 2012’s forecast of RM3129
per mt). Most of the experts believe that CPO prices should be supported in
1H13 due to the low production season but would trend lower in 2H13 when the
high production season starts.
Most bullish estimate
from MPOC CEO (Prediction: CPO prices to trade between RM2500-RM3200 per mt in
2013). Malaysia Palm Oil Council (MPOC) CEO, Tan Sri Datuk Dr Yusof Basiron
said he believes that the 2013 Stock-Usage ratio for CPO should decline and this
should lead to better prices. He also thinks that the current low CPO prices
were caused by a temporary supply imbalance, which had been wrongly speculated as
reduced demand. He also believes that Malaysian and Indonesian biodiesel
programmes could stabilise CPO prices.
The most bearish
prediction from Dorab Mistry (Prediction: CPO prices to fall below RM2000 per
mt in July-Aug 2013). Godrej International Ltd. Director, Dorab Mistry meanwhile
said he believes that CPO prices would tumble below RM2000 per mt but he, however,
does not think that it would fall below RM1800 per mt unless Brent crude oil
declined to US$80 per barrel. He believes that the August USDA with its
estimate of bumper US crop would be bearish to CPO prices. However, Dorab was
neutral on near term CPO prices as the low production season should reduce
inventories.
What we think?
Our average CPO prices forecast for 2013 at RM2500/mt are more optimistic than
Dorab Mistry as we believe that CPO prices should increase to about RM2700/mt
by Jun before bottoming at RM2100/mt in the peak production season in SepOct.
We believe that the key variance between our forecast and Dorab’s is in the
price outlook for Brent crude oil. Our in-house economist is projecting WTI
crude oil to average US$97.5 per barrel in 2013 (implied Brent crude oil:
US$113 per barrel) as he thinks that the global economy should still be growing
in 2013 despite being at sub-par growth. We anticipate palm oil demand to pick
up in the northern hemisphere during Apr-Sep as the weather warms up. This
should allow palm oil to become usable again. Additional demand growth should
come in from the biodiesel market too due to its huge discount against Brent
crude oil, which makes it economically viable to produce even without
government subsidy. However, we are less optimistic than MPOC possibly due to
our expectation of a higher stock-usage ratio.
Source: Kenanga
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