This week, Wilmar closed at a new one-year high, finishing above $3.40 for the first time since 28 April 2014. Its climbing stock price is propelled by expectations of a palm oil rally in the event that El Nino returns to Southeast Asia and hurt output. El Nino was declared by Australia’s Bureau of Meteorology on 12 May 2015, leading palm oil prices to increase to a five-week high in the same week.

On the outlook of crude palm oil prices and the Singapore agribusiness space, Macquarie Equities Research (MER) shared their view in a research piece published on 20 May 2015. Here are excerpts from the article…

MER is Neutral on the Singapore agribusiness space. MER has cut their estimates in related stocks on the back of our lower crude palm oil (CPO) price forecasts, which already reflect partial success for the Indonesian biodiesel mandates and some El Nino risk. If there is more evidence that the biodiesel mandates are finally moving into execution mode, and that the current El Nino will be ‘strong’ and not ‘weak / moderate’, MER will have the ammunition to get positive on the sector. The next few months should be more telling in both areas.
 
Base case: heavy 2015, better 2016. MER sees soybean and palm oil as well supplied through 2015. MER expects a tighter CPO balance in 2016, driven by rising Indonesian biodiesel demand. MER assumes Indonesia achieves a B15 blend in the subsidized part of the diesel market but is less successful in the non-subsidized part. MER’s new US$631/t (2015 estimated) and US$702/t (2016 estimated) CPO price forecasts also incorporate El Nino risk: MER assumes that CPO’s discount to soybean oil in 2016 tightens to a level consistent with the 12-month periods post ‘weak / moderate’ events in the past.

 
Could ‘break either way’ in the coming months: Indonesian biodiesel and El Nino are two key CPO price-setting catalysts for the next 6 months, in MER’s view and there remains uncertainty with respect to both:

- While Indonesia seems close to implementing the CPO export levies with which it plans to subsidize part of its biodiesel programme, there is still no clarity on how the government will administer those subsidies once they start being collected. Last year’s tendering exercises via Pertamina were unable to secure the biodiesel volumes the government was hoping for.

- On El Nino, the Australian Bureau of Meteorology (ABM) is calling for a ‘substantial’ event in the second half of 2015, which would be the first since 1997 to 1998. Wary of last year’s false alarm in this area, MER looks forward to the next couple of updates from the ABM.

In a Bull Case, where the data breaks positively (e.g. the call for a strong El Nino gains more traction, and not just from the ABM) MER can conceivably see prices rise to US$800/t in 2016, 14% above their 2016 forecast. In the Bear Case, where MER sees a fizzling of these catalysts as in 2014, 2016 CPO prices may get stuck at US$640/t, or 9% below MER’s forecast.


Neutral on Wilmar
In light of the uncertainty above, MER has stayed Neutral on Wilmar, which in MER’s opinion is the most diversified player amongst the Singapore agribusiness plays, making it the least compelling play on CPO trends.

Source: Macquarie Research - 28 May 2015