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Stock Index
Bahana Securities

23 Oct 2019 | 17:40 WIB
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Bahana Securities

23 Oct 2019 | 17:40 WIB
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Analysis: Plantations Under Pressure

Soyabean oil and palm oil are naturally interchangeable goods, translating to strong correlation in prices for both commodities. Due to the abundance of global soyabean oil inventory, soyabean oil is currently trading at its lowest price in 5 years resulting in a narrowing of the CPO discount to soyabean price (exhibit 1). Factoring in these conditions, we maintain our bearish view for CPO prices in 2015F.


On the government’s biodiesel plan, the B15 program has been launched in April 2015, much sooner than its previous schedule in September 2015. Hypothetically, with implementation of B15, biodiesel consumption could jump 50% y-y to 5.3m kl per annum, which would require feedstock of around 4.7-5.3m tons of CPO or 10% of Indonesia’s total CPO production, suggesting potential support for CPO prices going forward.


However, we believe two main issues from this biodiesel program remain unresolved: (1) Lack of infrastructure to effectively distribute the biodiesel on a nationwide basis, and (2) Weak enforcement and control from the government to ensure achievement of blending target. A look at the 9M14 realization level is quite disappointing with only a 42% consumption target achieved (exhibit 2).


Meanwhile, low oil prices have reduced the feasibility of the biodiesel program. To solve the price mismatch, the government plans to launch a CPO-Supporting Fund scheme in the near future. The scheme will apply levies of USD50/ton on CPO exports and USD30/ton on CPO-derivative products. The fund will then be used to cover the price differential from biodiesel blending and other activities in the CPO industry (ie, replanting, R&D).


Although the government decree has not been released yet when this report is made, we see this move translating to Indonesian planters losing competitiveness relative to their Malaysian peers.


At this stage of the market cycle, we lower our CPO price assumption by 8%, from USD725/ton to USD665/ton (Rotterdam CIF) in 2015 on the back of weak commodity prices, sluggish global demand and policy risk. We note that ytd the CPO price has averaged USD672/ton (2014 average: USD815/ton), down 18% y-y over the same period.  Signs of weaker global demand can be seen in major CPO-importing countries such as India and China.


In summary, we maintain our UNDERWEIGHT rating on the Indonesian plantation sector, and expect the sector’s ytd market underperformance to persist ahead.


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