Lower stockpile to support prices

5:16 AM | January 14, 2016 Sektoral No Comments

DBS Group Research . Equity

 Malaysia’s Dec-15 palm oil output came in below forecast at 1.399m MT
 Year-end stockpile of 2.632m MT was in line – as lower output was offset by lower net export
 We expect palm oil spot prices to close its gap vis-à-vis futures in the near term
 Top pick: Wilmar

Improving fundamentals. Dec-15 palm oil output of 1.399m MT (-15% m-o-m) was 9% below expectations, as FFB yields in Johor and Sabah dropped by 17% and 15% m-o-m (-4% and –
15% y-o-y), respectively. We continue to expect steeper-thanusual seasonal drop in 1Q16 FFB yields – reflecting lagged impact from severe dry weather since May15. The Dec-15 palm oil output brought CY15 output to 19.962m MT (in line).

Employing lower expected yields (vs. our previous forecast); Malaysia’s CY16F output is now projected to drop by another 3% y-o-y to 19.386m MT (subject to adjustments). We expect
Jan-16 output to drop further to 1.166m MT (-17% m-o-m). Easing pressure from inventories. Dec-15 palm oil stockpile of 2.632m MT represented the first drop since Jun-15 – as the steep fall in output outpaced 1% m-o-m lower exports in Dec- 15 of 1.483m MT. Except for EU, US and Japan, palm oil exports to India and China had each declined by 57k MT (-15%) and 66k MT (-41%) m-o-m due to rising domestic inventories. Dec- 15 palm oil imports remained relatively high at 82k MT,
indicating still ample supply from Indonesia.

However, with lower anticipated production, we expect palm oil inventory to bottom out at 2.4m MT in Feb-16 (representing stock/usage ratio of 12%), before recovering. Subject to Indonesia’s 20%
biodiesel blending, we expect Jan-16 exports to seasonally decline by 19% m-o-m to 1.207m MT – translating into end-Jan-16 stockpile of 2.437m MT (-7% m-o-m) – while Jan-16 imports are forecast to settle at 73k MT (-12% m-o-m).

Expect futures-spot price gap to close. Palm oil prices in the futures market have notably traded higher vis-à-vis the spot market since mid-Oct-15 – as impact of prolonged haze and announcement of Pertamina’s biodiesel tender were priced in
the futures market. Yet, ample supply in the spot market continued to depress prices. Now that output is on track to show a significant drop in 1Q16, we expect the gap to narrow

(i.e. spot prices to improve).
CPO prices under review. CY15 palm oil prices (FOB Pasir Gudang) averaged US$559/RM2,168 – in line with our expectations of US$543/RM2,200. Although current CPO price of US$510/RM2,169 remains below our CY16F average of US$538/RM2,350, we believe the upside risks (i.e. lower yields, higher biodiesel consumption, weaker Ringgit) are greater than the downside risks (lower-than-forecast Indonesian biodiesel demand and potential release of Argentine soybean inventory).