Biodiesel key game changer


KUCHING: Following the Palm and Laurics Oil Conference 2015 held recently, palm oil industry experts and analysts generally viewed that demand for biodiesel is an important game changer and crude palm oil (CPO) price catalyst, if the biodiesel mandate is implemented properly.

However, industry experts and analysts expressed mixed views on the future of CPO prices this year with some observing that the CPO prices could strengthen or remain flattish to bearish in the second half of 2015 (2H15).

During the conference, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) noted that several analysts highlighted that CPO stocks will be tight in 1H15 due to seasonally weaker fresh fruit bunches (FFB) production.

It added, production should recover in 2H15 but speakers Dorab Mistry, director of Godrej International Ltd and Thomas Mielke, executive director of ISTA Mielke GmbH Oil World, expect 2015 production to be 19.5 million metric tonnes (MT), a one per cent year-on-year (y-o-y) decline, and 19.4 million MT (a 1.5 per cent decline) respectively, compared to 2014’s 19.7 million MT.

“We note that this is more conservative than Malaysian Palm Oil Board’s (MPOB) own 2015 CPO production forecast of 20.1 million MT (an increase of two per cent).

“Comparatively, our in-house forecast falls squarely in between this range at 19.8 million MT (an increase of 0.5 per cent y-o-y) which we deem reasonable given the flattish growth rate due to poor weather conditions in late-2014 to early-2015,” it viewed.

“Also, we concur with the general consensus that CPO production is likely to recover in 2H15 and hence to exert downward pressure on CPO prices,” MIDF Research added.

RHB Research Sdn Bhd (RHB Research) in a separate report, noted that the CPO price projections made by the expert speakers during the conference ranged between an average of RM1,940 and RM2,500 per tonne for 2015.

“Although the price forecasts were not too far from our RM2,500 per tonne average for 2015, our view differed in that we expect CPO prices in 2H15 to be stronger than 1H15, on the back of a potential production disappointment in Indonesia.

“We believe the bulk of production disappointment will take place in 2H15, due to the delayed effects of the dry weather in 2H14,” it opined.

On the other hand, Maybank Investment Bank Bhd’s research arm (Maybank IB Research) expect a flattish 2015 CPO outlook with an average selling price of RM2,400 per tonne.

However, it noted, “Like Dorab, we expect stronger CPO price in 1H15 due to tight palm oil supply expectation on the back of muted FFB output growth in 1H15.

“While the sector call remains a ‘neutral’, we maintain our view that there is still a short term trading opportunity in the first quarter of 2015 (1Q15) as we expect CPO price to make its near term seasonal recovery to RM2,400 to RM2,500 per tonne by end 1Q15.

“This however, assumes that crude oil (Brent) price bottoms out at circa US$55 per bbl.”

Meanwhile, on the implementation of biodiesel mandate in Indonesia, MIDF Research said, during the conference, experts stressed the importance of a successful implementation of the Indonesian biodiesel mandate in order to be supportive of CPO prices.

RHB Research added, most speakers concurred with its belief that the Indonesian biodiesel demand is a game changer and price catalyst, provided it is implemented properly.

“There is already some positive development with the shift of biodiesel pricing to cost plus basis (CPO and US$188 per tonne), which removes the drag from low crude oil price,” it said.

However, MIDF Research noted that most analysts think Indonesia may not achieve the mandated amount this year.

“Mistry estimated additional consumption at best to be 0.5 million MT (a 31 per cent increase to 2.1 million MT) in 2015 against the Indonesian government target of three million MT.

“Dr James Fry (chairman of LMC International Ltd) pointed out that reduced export duties result in higher cost of feedstock and hence causes biodiesel production to be less attractive.

“We agree with their view that at the current zero duty and low crude oil environment, biodiesel production is uneconomical and meeting the government mandate will be challenging,” it explained.

Overall, MIDF Research said, “We are near-term positive on pure planters over downstream players as downstream margins should stay depressed due to the zero CPO export duty.

“We think 1Q15 is likely to improve q-o-q over 4Q14 due to better CPO prices (averaging RM2,280 per MT quarter to date versus RM2,194 in 4Q14, or four per cent increase) and flat-to-improving FFB production prospects.”

RHB Research and Maybank IB Research retained an overall ‘neutral’ view on the sector.