This ban is likely to be short-lived
It is final! ID is banning the exports of CPO, RBD Palm Oil, RBD Palm Olein
effective 28 April. BMD FCPO jumped 10% DoD yesterday. ID’s domestic
CPO price should quickly gravitate towards subsidized cooking oil price of
IDR14,000/liter. MY-centric planters (including refiners) are ST winners
while ID-based planters are ST losers as we believe the ban will be lifted
in 1-2 months. Preferred BUYs are now IOI and KLK. We advocate trading
on purer MY growers such as TAH, SOP, BPLANT and HAPL. And we expect
ST negative share price reactions on SGX and IDX planters.
International CPO price to stay firm in 2Q22
After flip-flopping, the ID government finally released a regulation that
will ban the exports of CPO, RBD Palm Oil and RBD Palm Olein (among
others) effective 28 April. The export ban will be reviewed monthly or as
when necessary. As we have highlighted in our previous report “2Q22:
Heightened price volatility on ID’s export ban”, without the export
market, ID will have an estimated excess supply of ~30mt of CPO
(annually) as ID is projected to produce ~48mt of CPO in 2022 (see Fig.1)
while domestic consumption is just ~18mt, comprising ~9mt of biodiesel
and ~9mt of food use (mainly cooking oil). We anticipate the storage tanks
in ID to “overflow” in 1-2 months, and market forces will push ID’s
domestic CPO price down quickly towards ID’s subsidized cooking oil price
of IDR14,000/liter, below the present domestic CPO price of IDR16,563/kg
or MYR4,971/t (last reported on 21 April). In contrast, we should witness
firmer CPO prices in BMD’s FCPO while the ban is in place as ID accounts
for 31% of global exports of 17 Oils and Fats in 2020 (see Fig.2). The ban
will surely worsen the already tight global edible oils supply following the
Russia-Ukraine war, and likely hasten demand destruction.
Ban poses ST earnings risks to all ID planters
Besides ID-based refiners losing their lucrative export margins due to the
ban during the duration of the ban, all ID-based growers will also suffer
from our anticipated lower CPO selling prices in the domestic market. The
ban is to address the shortage of affordable cooking oil in ID. We envisage
the price gaps between MY-ID to widen sharply during the ban period (see.
Figs.4a-b for historical gaps).
MY-growers and refiners are beneficiaries for now
MY-based planters are clear winners for now. Pure MY plays include SOP,
TAH, BPLANT, and HAPL (Fig.3). Among the large caps, IOI has the least
exposure to ID. But bear in mind that this ID export ban is just temporary.
When storage tanks are full in ID, FFBs will be left to rot in the fields as
the mills will not be able to buy FFBs (especially from smallholders) to
process, creating a different set of social and economic problem for the
President of ID. And when the ban is lifted, we expect ID’s palm oil to
flood the global market with the inventory accumulated during the ban
and as the industry prepares to make room for the bigger seasonal harvest
in 2H22. When that happens, prices on BMD Futures may correct sharply.
We are keeping our MYR5,000/t CPO ASP forecast for 2022E and
MYR3,400/t for 2023E.