We are OVERWEIGHT on the plantation sector, which we believe will have a good year ahead with most companies seeing stronger profitability. This will be driven by stronger demand for palm oil from the food and fuel sectors, higher ASPs due to lacklustre production growth in Indonesia as well as lower fertiliser costs. Our average CPO price assumptions are raised to MYR2,700/MYR2,900 for CY14/15.
¨ Biodiesel push. Malaysia is raising its mandatory biodiesel blend to 7% from 5% currently as early as Dec 2013, while Indonesia is pushing for a 3m tonnes of biodiesel (B100) consumption next year. We believe the moves by the governments of the world’s two biggest biodiesel producing countries will have a significant impact on palm oil demand. Note that never before has palm biodiesel received such a strong mandate.
¨ Cheaper fertiliser a boon. In view of the weaker fertiliser demand and the breakup of the potash cartel, fertiliser prices are expected to be cheaper in 2014. In USD terms, composite fertiliser cost is 23% cheaper compared to Oct 2012 when plantation companies locked in their 1HCY12 requirements. With lower fertiliser prices seen in 2014, plantation companies could enjoy lower unit cost of production, which should boost their margins. In the worst-case scenario, production cost will remain flat in the year ahead, as opposed to its multi-year hikes since 2006.
¨ Food demand continues to grow. With the global economy now on a stronger footing, there should be no faltering in demand from the food sector. 2014 could see palm oil regaining lost market share in China as a result of the government’s austerity drive, which has hurt the restaurant business, a heavy user of palm oil.
¨ Stock/usage ratio to fall to multi-year low. Assuming Indonesia uses 2m tonnes of CPO for biodiesel production (vs targeted 3m tonnes), and its export/production grow by 5% and 2m tonnes respectively, the stock/usage ratio will fall to 8% from 13% at end-2013, its lowest since 2009. Such a low stock/usage ratio will likely result in CPO prices maintaining a very narrow discount against soybean oil prices.
¨ OVERWEIGHT. While maintaining Overweight on SGX plantation stocks, we upgrade the regional plantation sector to OVERWEIGHT (from Neutral) as the earnings outlook brightens after two years of contraction. We raise our CPO price assumptions for CY14 and CY15 to MYR2,700/tonne and MYR2,900/tonne respectively from MYR2,600.
Publish date: 23/12/13