Analysis: Indonesian plantations update: Gradual price recovery
Agustinus Reza Kirana
The Jakarta Post
The Predictive Ocean Atmosphere Model for Australia (POAMA) projects a high El NiÃ±o probability (Table 1) with sea surface temperatures (SST) anomaly level potentially rising an average of 1Â° C, threatening Southeast Asia's Crude Palm Oil (CPO) producing countries, in particular Indonesia and Malaysia.
Given that El NiÃ±o was last seen in 2009, its occurrence this year is likely, as the interval between El NiÃ±o events is around five to six years (Table 2). However, we expect the real impact of El NiÃ±o on companies' fresh fruit bunch production to only be felt in first quarter of 2016, translating to higher CPO prices ahead based on historical records. In addition, the price gap between soybeans and palm oil has been rising, making CPO more attractive to buyers.
Separately, the Indonesian government has signed the Biodiesel B15 program with the implementation of the CPO levy likely to be pushed from the end of May to August, according to the Indonesian Palm Oil Producers Association (GAPKI). Due to this delay, we only expect a slight increase in domestic biodiesel demand in 2015.
Further away, December flooding in Malaysia is likely to result in weak CPO production this year. In Indonesia, we have also noted a slowdown in palm oil companies' production in the first quarter of 2015. There are lower yields but is GAPKI maintaining its 2015 target of 31.5 million tons, flat year-on-year (yoy), though there are still fears of an El NiÃ±o event that could adversely impact Indonesian domestic production.
After factoring in the issues discussed above and the current low Brent oil price, we revise up our 2015 Rotterdam price estimate slightly from US$660/ton to $690/ton, down 16 percent yoy (2014 average: $825/ton), with a limited upside of only 3 percent compared to the average Rotterdam price of $670 in the first five months of this year.
However, we expect the net impact of this on domestic CPO players to be significant in the short term, particularly as the government has delayed the implementation of the palm oil levy to August from the earlier scheduled date in May, while export tax for Rotterdam remains at zero as long as the CPO price is below $750/ton.
We also raise our local currency forecast to Rp 13,000/US dollar for 2015 and to Rp 13,150/US dollar for 2016 due to the stronger US dollar outlook. Nevertheless, we have made little changes to our 2015 CPO price assumption given the levy implementation of $50 for CPO and $30 for palm oil products. However, due to flat production estimates, we have reduced the 2015-2016 forecast earnings by 5 to 17 percent for the companies that we cover.
Following low production, which resulted in gradual CPO price recovery, we raised our rating on plantations from underweight to neutral. Despite a more positive CPO price outlook, strong market performance for most of our stocks in the past month translates to expensive valuations. However, we upgraded Tunas Baru Lampung (TBLA) from hold to buy because cooking oil sales have increase and their general value decreased.
The writer is a research analyst at Bahana Securities.
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