Long Term: Neutral
We
hosted an Indonesia Plantation Day with a focus on the country's
biodiesel efforts. Overall, we are more optimistic on the biodiesel
programme as we gather that the biodiesel tender is not the only avenue
Pertamina is pursuing to secure biodiesel to meet the higher mandate,
contrary to some expectations. The government appears ready to overcome
any challenges to ensure the mandate is met. We expect the second
biodiesel tender results by Pertamina to show a favourable take-up rate
as the pricing mechanism for biodiesel has improved. However, our
Neutral stance on the sector is intact. Our top picks are First
Resources, Wilmar, AALI, LSIP and Ta Ann Holdings.
What Happened
CIMB hosted a plantation day conference in Jakarta on Wednesday to provide investors the opportunity to hear from six industry experts on the progress and challenges facing the various stakeholders in meeting Indonesia's higher biodiesel mandate effective 1 Jan 2014, as well as on production and fertiliser price prospects. Also at the conference were representatives from 8 plantation companies who met with investors in one-on-one and small group discussions.
What We Think
We are more positive on the execution of the Indonesia biodiesel mandates after the key stakeholders pledged their readiness in meeting the higher target. Recently, the market was disappointed when Pertamina revealed that it had secured only 18% of its intended target of 6.6m kl for 2014-15 during its first biodiesel tender. The good news we hear is that that the second tender is likely to attract a higher take up rate as Pertamina has improved the pricing mechanism. Also, Pertamina is willing to revert to the old pricing formula for the remaining supplies that are not tendered out and is committed to fulfilling the mandate. PLN indicated that it is making good progress in meeting its 20% mandate which is also a positive takeaway for us.
What You Should Do
If successfully executed, this could raise the biodiesel usage in Indonesia from 600k-1m kl in 2013 to around 3.3m-4m kl. This will, in turn, reduce the palm oil exports from Indonesia and boost CPO price prospects. We believe the market has not priced in the additional biodiesel demand potential from Indonesia due to concerns over pricing and logistics challenges. However, a successful tender and improved pricing for biodiesel could change market's perception. We maintain our view that the government will raise its usage to 2m kl in 2014, lower than its target of 3.3m-4m kl. But there could be an upside surprise if it is able to secure most of the intended supply through the tender process. We keep our average CPO price forecast of RM2,700 per tonne for 2014, Neutral stance, and preference for selected planters.
CIMB hosted a plantation day conference in Jakarta on Wednesday to provide investors the opportunity to hear from six industry experts on the progress and challenges facing the various stakeholders in meeting Indonesia's higher biodiesel mandate effective 1 Jan 2014, as well as on production and fertiliser price prospects. Also at the conference were representatives from 8 plantation companies who met with investors in one-on-one and small group discussions.
What We Think
We are more positive on the execution of the Indonesia biodiesel mandates after the key stakeholders pledged their readiness in meeting the higher target. Recently, the market was disappointed when Pertamina revealed that it had secured only 18% of its intended target of 6.6m kl for 2014-15 during its first biodiesel tender. The good news we hear is that that the second tender is likely to attract a higher take up rate as Pertamina has improved the pricing mechanism. Also, Pertamina is willing to revert to the old pricing formula for the remaining supplies that are not tendered out and is committed to fulfilling the mandate. PLN indicated that it is making good progress in meeting its 20% mandate which is also a positive takeaway for us.
What You Should Do
If successfully executed, this could raise the biodiesel usage in Indonesia from 600k-1m kl in 2013 to around 3.3m-4m kl. This will, in turn, reduce the palm oil exports from Indonesia and boost CPO price prospects. We believe the market has not priced in the additional biodiesel demand potential from Indonesia due to concerns over pricing and logistics challenges. However, a successful tender and improved pricing for biodiesel could change market's perception. We maintain our view that the government will raise its usage to 2m kl in 2014, lower than its target of 3.3m-4m kl. But there could be an upside surprise if it is able to secure most of the intended supply through the tender process. We keep our average CPO price forecast of RM2,700 per tonne for 2014, Neutral stance, and preference for selected planters.
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