Plantation sector pins hope on dry weather

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KUCHING: The possible dry weather could bode well for the plantation sector as the weather might result in supply shock.

Analysts have noted that there is a 50 per cent chance that El Niño might return by mid-year while below average rainfall is anticipated.

According to the research arm of Maybank Investment Bank Bhd (Maybank IB Research), the Australian Bureau of Meteorology (ABM) said that the recent warming of the tropical Pacific Ocean has primed the Pacific for an El Niño.

“ABM presently attaches a 50 per cent probability of El Niño happening but cautions that model outlooks have lower predictive ability spanning the February to May period,” it said.

Regardless of whether an El Niño eventually materialises, Maybank IB Research noted that the Malaysia Meteorology Department has forecast below-average rainfall in the region for the April to September 2015 period.

The research arm added that affected areas are Peninsular Malaysia, Sabah and parts of Sarawak over the next two months, and thereafter Kalimantan and the southern tip of Sumatra.

Elsewhere, it noted that the US Department of Agriculture (USDA) prospective plantings report released on March 31, 2015 revealed that US farmers presently favour more soybean planting this spring at the expense of corn.

“This may cap the near-term price upside of soybean (and potentially soybean oil) provided weather is favourable throughout this planting season,” the research arm said.

It added that the ample soybean supply outlook contrasted the muted palm oil production outlook for the first nine months of 2015 (9M15).

In Maybank IB Research’s view, the sector lacks a short term re-rating catalyst.

The research arm noted that the only foreseeable upside to crude palm oil (CPO) price is the advent of weather anomalies (like El Niño) which may result in supply shock.

In the meantime, it said that the US planting progress requires close monitoring.

All in, Maybank IB Research remained ‘neutral’ on the sector. The research arm’s RM2,400 per tonne CPO average selling price (ASP) forecast for 2015 is unchanged.

Its long term top ‘buys’ in the region are Bumitama Agri, First Resources, Genting Plantations Bhd, Sarawak Oil Palms Bhd and Sime Darby Bhd.

The research arm advocated ‘sell’ on IOI Corporation Bhd for the group’s steep valuation.

Maybank IB Research concluded that the key swing factors in 2015 are weather, crude oil price direction, further ringgit and rupiah weakness, changes in government policies, and strict enforcement of biodiesel mandates in Indonesia and Malaysia.