Analysts bullish on plantations sector’s prospects in 2017

KUCHING: Analysts are bullish on the crude palm oil (CPO) price movement for the first half of 2017 (1H17) but they still cautioned that risks remains in the year ahead for the sector.

In a report, the research arm of Public Investment Bank Bhd (PublicInvest Research) pointed out that CPO prices have had a good run in 2016, rising more than 20 per cent to RM2,600.

“We expect to see CPO prices hovering around RM2,800 per metric tonne (MT) to RM3,000 per MT in 1H17, supported by tight inventories and improved demand from China before tapering to the RM2,300 to RM2,400 levels in 2H as production starts recovering,” it said, noting that its full-year average CPO price assumption for 2017 is RM2,600 per MT.

On the supplies side, the research team expect CPO supplies to remain tight for 1H17, due to the current low production period, a pick-up in demand ahead of Chinese New Year and slower production growth in Malaysia due to the lagged effect from El Nino.

However, it noted that world palm oil supplies are expected to recover in 2017.

“Majority of the surveys showed that palm production is expected to rise by at least 10 per cent to 64.36 million MT for 2017. Indonesia, which made up more than 50 per cent of world’s palm oil production, will see a strong rebound in 2017 with a double-digit growth from 28.5 million to 30 million MT to 32 million to 33 million MT.

“Malaysia production is projected to advance from 17.3 million to 17.4 million MT to 19.5 million MT next year. Palm oil is currently experiencing low production cycle period and will only see a recovery by June,” it explained.

The research team also pointed out that China’s buying interest might make a comeback.

“We expect to see re-stocking orders coming in ahead of Chinese New Year. The deteriorating diplomatic relations between US and China under the newly elected US president due to the latter’s protectionism policies might also reduce the imports of soybean from the US.

“In addition, the soybean oil price premium over CPO price has expanded from US$98 per MT in August to US$131 per MT, currently making CPO more competitive for buyers,” PublicInvest Research opined.

However, in a separate report, RHB Research Sdn Bhd ( RHB Research) pointed out that there has been higher soybean meal demand in China.

“According to media sources, demand for soybean meal in China has also been rising, caused by large hog herds. China has been buying 70 to 75 per cent of US’ soybean exports in the last few weeks, compared 60 to 65 per cent previously.

“Although this is not expected to continue for the long term, as China’s own domestic corn crop is growing, this has also had a positive impact on soybean prices of late,” it pointed out.

Nevertheless, RHB Research noted that CPO prices should start moderating after the first quarter of 2017 (1Q17).

It explained that this could be due to CPO output recovery from Malaysia and Indonesia in 2017 which is expected to start coming through after 1Q17.

“For 2017, barring all unforeseen weather extremities, Oil World projects CPO output to recover by 9.4 per cent to 64 million tonnes,” it said.

Aside from that, it pointed out that the USDA revised up its oilseed crop projection for 2017 to 128.2 million tonnes (up by 1.2 million tonnes from October), which is up 11 per cent year-on-year (y-o-y).

“This is on the back of the bumper soybean crop in the US, which is also estimated at 11 per cent higher y-o-y,” it added.

RHB Research also noted that higher crop is expected to come through from South America from 2Q17.

“Although soybean plantings are running behind schedule currently (at 34 per cent of total area compared with normal average of 46 per cent) due to dry weather, farmers are expected to be able to catch up within the next few weeks, as rainfall is expected to normalise soon. Based on initial estimates, soybean output in South America is also set to rise by 4.5 per cent y-o-y in 2017,” it said.

RHB Research also believed that post the run-up to the Chinese New Year festival in January, demand from China is expected to moderate further, given its large stockpiles in reserve of six million tonnes of soybean and 3.5 million tonnes of rapeseed oil.

“China’s demand remains lacklustre, with edible oil imports down 21.1 per cent year to dateOctober, and palm oil imports down 30 per cent y-o-y. Palm oil’s market share fell to 79 per cent (from 88 per cent in 2015) YTD-October.

“As the price gap between CPO and soybean oil of US$143 per tonne is now within the historical averages of US$100 to US$150 per tonne, there is unlikely to be much switching between palm and soy in the near term,” it added.

Meanwhile, PublicInvest Research believed that the plantations sector could see a boost from the increased biodiesel mandate announced by the US earlier this year.

“US has increased its biofuel mandate by six per cent to 19.28 million gallons for 2017, which is a new record level. The higher biodiesel mandate will help improve soybean oil consumption, which will also tighten vegetable oil inventories.

“Indonesian biodiesel consumption had an encouraging year in 2016, backed by its subsidy programme. It is expected to use up about 2.5 million kilolitres (2.15 million MT) in 2016 and targets to double the consumption in 2017,” it said.

Overall, PublicInvest Research pegged an ‘overweight’ call on the sector. However, RHB Research maintained its ‘neutral’ view on the plantations sector.