Plantation sector
Maintain neutral: As demand for palm oil is not immune to the slowing of global economic growth, we are pruning our 2012/13 crude palm oil (CPO) price forecasts by 9% to 12% on the heels of GDP downgrades. This reduces our earnings numbers by up to 24%.
We upgrade our rating for one stock and downgrade two stocks, which leaves our sector rating at “neutral”. Though the sector lacks catalysts, selected stocks have priced in the concerns and look attractive. Our picks remain Wilmar International Ltd, Golden Agri Resources Ltd, PT SIMP Indofood Plantations and Indofood Agri Resources Ltd.
Factoring in lower GDP growth, we pare down our CPO price forecasts by 12% to US$880 (RM2,754) per tonne for 2012 and by 9% to US$910 for 2013 while keeping our 2011 forecast of US$1,100. This translates into a 20% price decline in 2012 and a 3% uptick in the following year. Prices may weaken because of higher stocks as well as lower demand. Supply of edible oils could outstrip demand by around 0.7 million tonnes in 2011/12 even if demand growth keeps up with the historical 10-year average of 5.8 million tonnes.
Slowing economic growth hurts global demand for edible oils in several ways: (i) Biodiesel usage (11% of total demand) is sensitive to crude oil price, which is correlated to GDP growth; (ii) Governments could reassess or withdraw biodiesel mandates or incentives to reduce government spending; and (iii) Speculative money may flow out of commodities, leading to a sharp fall in prices in times of economic uncertainty.
We forecast a milder CPO price decline of 12% for 2012 than 2008/09’s 28% as the scenario today is different. Slower growth of palm supplies in 2012, rising disposable incomes in Asia, fears of potential crop damage due to La Nina weather phenomenon and ample liquidity in the financial system are the key positives that sets today’s fundamental CPO price outlook apart from 2008’s.
We have taken into account the new export tax for Indonesian palm products into our new CPO selling price forecasts for Indonesia.
Oil World’s (OW) projection for edible oil demand to outstrip supply may be ambitious given the possibility of a mild recession in the European Union. OW expects world consumption to rise by seven tonnes in October 2011 to September 2012, above the 10-year average of 5.8 tonnes. It will outstrip the projected rise in supply by 6.7 tonnes, higher than the previous season’s 5.7 tonnes and 10-year average of 5.9 tonnes. If demand grows in line with the 10-year average of 6 tonnes, supply could exceed demand for the first time since 2009.
Biodiesel demand (10.5% of edible oil consumption) has been growing at an average rate of 2.7 tonnes over the past four years. But incremental demand started slowing down in 2009 due to waning support and lower crude oil price. It revived this year after the renewal of the US biodiesel credit and higher mandates in Brazil and Argentina. Incentives for biodiesel may be reassessed if global economic growth slows sharply and reduces fiscal expenditure or if there is renewed criticism of biofuel policies’ impact on food prices. — CIMB IB Research, Oct 25
This article appeared in The Edge Financial Daily, October 27, 2011.
Maintain neutral: As demand for palm oil is not immune to the slowing of global economic growth, we are pruning our 2012/13 crude palm oil (CPO) price forecasts by 9% to 12% on the heels of GDP downgrades. This reduces our earnings numbers by up to 24%.
We upgrade our rating for one stock and downgrade two stocks, which leaves our sector rating at “neutral”. Though the sector lacks catalysts, selected stocks have priced in the concerns and look attractive. Our picks remain Wilmar International Ltd, Golden Agri Resources Ltd, PT SIMP Indofood Plantations and Indofood Agri Resources Ltd.
Factoring in lower GDP growth, we pare down our CPO price forecasts by 12% to US$880 (RM2,754) per tonne for 2012 and by 9% to US$910 for 2013 while keeping our 2011 forecast of US$1,100. This translates into a 20% price decline in 2012 and a 3% uptick in the following year. Prices may weaken because of higher stocks as well as lower demand. Supply of edible oils could outstrip demand by around 0.7 million tonnes in 2011/12 even if demand growth keeps up with the historical 10-year average of 5.8 million tonnes.
Slowing economic growth hurts global demand for edible oils in several ways: (i) Biodiesel usage (11% of total demand) is sensitive to crude oil price, which is correlated to GDP growth; (ii) Governments could reassess or withdraw biodiesel mandates or incentives to reduce government spending; and (iii) Speculative money may flow out of commodities, leading to a sharp fall in prices in times of economic uncertainty.
We forecast a milder CPO price decline of 12% for 2012 than 2008/09’s 28% as the scenario today is different. Slower growth of palm supplies in 2012, rising disposable incomes in Asia, fears of potential crop damage due to La Nina weather phenomenon and ample liquidity in the financial system are the key positives that sets today’s fundamental CPO price outlook apart from 2008’s.
We have taken into account the new export tax for Indonesian palm products into our new CPO selling price forecasts for Indonesia.
Oil World’s (OW) projection for edible oil demand to outstrip supply may be ambitious given the possibility of a mild recession in the European Union. OW expects world consumption to rise by seven tonnes in October 2011 to September 2012, above the 10-year average of 5.8 tonnes. It will outstrip the projected rise in supply by 6.7 tonnes, higher than the previous season’s 5.7 tonnes and 10-year average of 5.9 tonnes. If demand grows in line with the 10-year average of 6 tonnes, supply could exceed demand for the first time since 2009.
Biodiesel demand (10.5% of edible oil consumption) has been growing at an average rate of 2.7 tonnes over the past four years. But incremental demand started slowing down in 2009 due to waning support and lower crude oil price. It revived this year after the renewal of the US biodiesel credit and higher mandates in Brazil and Argentina. Incentives for biodiesel may be reassessed if global economic growth slows sharply and reduces fiscal expenditure or if there is renewed criticism of biofuel policies’ impact on food prices. — CIMB IB Research, Oct 25
This article appeared in The Edge Financial Daily, October 27, 2011.
