By A. Stephanie
Dorab Mistry
In less than two months, vegetable oils trader Dorab Mistry’s view on crude palm oil (CPO) prices for the latter half of 2015 has taken a bearish turn.
The CPO price analyst is frequently seen at palm oil industry gatherings. He was at Bursa Malaysia’s Palm and Lauric Oils price outlook conference (POC) 2015 on March 4 and forecast CPO prices to rise to RM2,500 per tonne in May and fall to RM2,100 per tonne thereafter.
However, in a recent dialogue with UOB KayHian in Singapore, Mistry now expects CPO prices to range between RM2,100 and RM2,300 per tonne for now, with prices falling to RM1,900 after July.
Mistry is a director with Godrej International Ltd, which engages in the trading of vegetable oils worldwide. The company is a subsidiary of Godrej Industries Ltd, India’s leading manufacturer of oleochemicals and makes more than a hundred chemicals for use in over two dozen industries, making it a leading CPO buyer.
Maintaining its “market weight” call on the regional plantations sector, UOB KayHian released a report this morning, noting Mistry’s emphasis that the market should let CPO prices fall further so as to attract demand.
2015 focus on demand
Demand remains the main focus for 2015, as for the year to date, demand for vegetable oils – particularly palm oil have been been disappointing, especially for palm oil.
This has been attributed to several factors, namely: supply shock from a stronger-than-expected recovery of estates post flooding in the fourth quarter of 2014, disappointing demand, narrowed spread between soybean oil and palm olein, and delay of Indonesia’s biodiesel mandate.
Increasing palm oil stocks, both in Malaysia and across the region continue to be the focus of analysts. Next Monday, the Malaysian Palm Oil Board (MPOB) will release official figures for Malaysian palm oil stocks as of end-April.
This morning, CIMB Research preempted these with its own forecast, expecting local stocks to rise by 20%, hitting a five-month high of 2.24 million tonnes based on an internal survey of 22 planters.
Meanwhile, following Mistry’s dialogue, UOB KayHian reported that an excess of at least six million tonnes of palm oil meant for discretionary biodiesel blending will now need to be channelled into new markets.
“Although food demand is expected to expand by four million tonnes in 2015, it is still insufficient to absorb this excess volume from the discretionary biodiesel market,” the report noted.
Mistry’s forecast prices at POC 2015, had proved inaccurate due to the faster-than-expected palm oil production recovery and overconfidence in the rollout of Indonesia’s biodiesel mandate.
Jakarta’s biodiesel levy
Joko “Jokowi” Widodo
This afternoon, Indonesian President Joko “Jokowi” Widodo finally signed a regulation requiring exporters to pay a levy of US$50 (RM180) per CPO tonne and US$30 for processed palm oil product shipments. The levy was first mooted in late March.
Malaysian palm oil futures hit a one-month high of RM2,200 in early trade after Indonesia signed the export levy.
Besides the long delay in Indonesia’s biodiesel implementation which may spur demand for two million tonnes of palm oil from Indonesia, Mistry’s revised forecast of RM1,900 for the latter half of the year also comes on the back of the stronger-than-expected production from Malaysia and recent good weather conditions which may lead to more production.
This is down from the six million put aside for biodiesel stocks, as the vegetable oils trader believes that after all the disappointments, the market may not react to further biodiesel announcements by the Indonesian government, unless Pertamina calls for the first biodiesel tender for the year.
Mistry said this is likely to happen after June and for every month of delay, approximately 300,000 tonnes of biodiesel demand could disappear and this is negative to palm oil prices.
CPO exports fall
Increasing palm oil stocks across the region has not only been driven by increased production but also lower exports, which CIMB Research estimates has fallen by 13% year-on-year (y-o-y) in April.
UOB KayHian expects imports by China to be lower y-o-y due to the absence of financial traders, higher soybean crushing, and also the potential release of its state reserve stock of five million tonnes of rapeseed oil.
It said: “Palm oil exports to Europe have been lower as well due to the absence of biofuel demand. India, which is the sector’s only positive market, is expected to import more palm oil in 2015 due to lower domestic soyoil supply as local crushers are reluctant to crush soybeans given the weak demand for soymeal and the potentially lower monsoon rainfall will lead to lower domestic oilseeds production.”
Palm typically tracks soyoil, a common food and fuel substitute. The US July soyoil contract rose 1% in early Asian trade, while the most active September soybean oil contract on the Dalian Commodity Exchange gained 1.3%.
Soyoil prices to dip
Soybean could see a dip once US soybean planting becomes more visible, as Mistry opined that current soybean prices have yet to factor in another round of potential record-high production from the country.
He said: “US farmers are likely to plant soybeans in the unplanted corn areas as delay or shortfall of rainfall led to slower corn planting and a miss in timing. Once the final planting acreage is announced, soybean prices could see another dip.”
Mistry is expecting soybean prices to decline to US$9 per bushel while West Texas Intermediate (WTI) crude oil should stay at US$50 to US$70 per barrel and soyoil at US$600 per tonne free on board (fob).
Due to the volatility in commodity prices, Mistry is tagging Singapore Exchange (SGX)-listed Wilmar and Bursa Malaysia-listed Sime Darby for long-term investment. He reckoned that now is a good time to invest in plantation stocks as the commodity cycle is at its low point, and share prices have declined and are now more attractive.
“Plantation companies are good for long-term investment given their strong cash flows, which allows them to pay good dividends,” he said, noting a preference for plantation companies with integrated business models, which allow companies to preserve the margins of its products despite volatility in commodity prices.
UOB KayHian concurred that integrated players are less volatile in term of earnings, but with no near-term (within 12 months) share price catalysts, the regional research house has maintained its “hold” recommendation on both counters, with target prices of RM9.35 for Sime Darby and S$3.65 for Wilmar.
The research house is reviewing CPO price assumptions.
“Our current earnings expectation are based on CPO price assumptions of RM2,525 per tonne for 2015 and RM2,600 per tonne for 2016. A 10% cut to our assumptions for both years will lead to an earnings decline of 11% to 23% for upstream players and 4% to 8% for integrated players,” it noted.
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