CPO

CPO: Malaysian Palm Oil Board’s Dec ’15 inventory finally eased to 2.63 MT (-10%m/m, +31% y/y) from its record level of 2.91 MT in Nov, mainly on seasonally lower CPO production, while exports were surprisingly strong at 1.48 MT (-1% m/m, -2% y/y).

CPO production is on a seasonal decline and will post its lowest output in Feb ’16. Despite the production decline, the preliminary export estimates for the first 10 days of Jan by Intertek suggest a healthy 15% m/m increase to 0.32m MT. A sustained positive export growth in Jan will draw down inventories further, boosting spot prices.

Although the Northeast monsoon has brought back the much needed rainfall in latter 2015, Maybank-KE highlights that the El Nino damage had already been done, citing market’s expectations for much lower FFB yield in 2016.

This situational play should benefit CPO price in general as it typically more than compensates for the decline in production. A further drawdown in inventories will help narrow the price gap between the spot and 3M futures CPO price.

Maybank-KE maintains view that CPO prices could trend higher in 2016 and peak between Mar-May with the possibility of hitting RM2,700/t. Maybank-KE has a Neutral view on the sector, but sees trading opportunities for El Nino within 1H16.

For Singapore-listed plantation companies, Maybank-KE has the following ratings:
Wilmar: Buy, TP $4.14
First Resources: Hold, $1.73
Bumitama Agri: Hold, $0.85