JPM Plantations - Feedback from KL Palm Oil Conference

Overall tone generally bullish – ALERT


• Day 1 of the KL Palm Oil Conference. The two-day palm oil conference in KL (9-10 Mar) is being attended by 1,700 participants involving industry players, analysts, fund-managers locally and overseas. The key industry experts/speakers admitted that they had been generally wrong on their bearish view on CPO prices in 2009, as impact of the stimulus packages by governments were underestimated.

• Overall tone generally bullish. Interestingly, CPO US$ contracts will start trading in Chicago on the CBOT in collaboration with Bursa Malaysia Derivates in May-10, which will help improve the profile of palm oil globally. The long-term outlook was positive with palm oil's share of total edible oil global supply forecast to rise from 34% to 40% by 2015 and 46% by 2020. In the nearer term, the speakers were generally bullish with CPO forecast for 2010 ranging from M$2,400/t to M$3,300/t (spot: M$2,680/t), with the higher end of this range being propelled mainly by the risk from adverse weather (i.e. El Nino). Declining Malaysia CPO inventories estimated to fall to 1.6-1.65MT by Apr-10 from a peak of 2.24MT in Dec-09 should support prices.

• Key takeaways. Despite the soybean bumper harvest in 2Q10, the general view remains that this would be more bearish mainly on prices of soy-meal rather than soy-oil given stronger bio-diesel and food demand for the latter. Dorab Mistry (Director of Godrej International) who is well reputed, forecast CPO prices to range M$2,600-2,800/t over Mar/Jul-10, and to trend higher to M$2,800-3,200/t in 2H10 and 1Q11. (This assumes crude oil at US$70-95/bbl). The more bullish view from 2H10 is due to the peak of the soybean flow from South America after 2Q10 and expectations of CPO supply shortfalls by then from the lag adverse impact of the drought/El Nino since mid-09 on output. Hence, CPO output from Malaysia is forecast to fall marginally for the second consecutive year in 2010 (market expectations: 0.8MT rise), while that from Indonesia is forecast to rise 1MT (market expectations: 2.2MT rise). Dorab stated that this will also coincide with the start of the biological tree stress period for palm from 4Q10 on, and he believes it possible that palm oil may hence for a short while trade at a premium to soy-oil during this period due to its tighter supply.

• Comments. Our CPO forecast of M$2,450/t for 2010-11E is at the lower-end of the forecast range by the speakers as we have not priced in the risk premium from weather, though we have pointed out this as the key upside risk besides a rally in crude oil prices. We are OW on KLK and Sime in Malaysia (prefer Sime), Wilmar and First Resources in Singapore, and Astra Agro and London Sumatera in Indonesia.