Morgan Stanley raises 2016 CPO forecast price to RM2,750 per tonne

by **Cals** Fri 09 Oct 2015, 22:55

Morgan Stanley raises 2016 CPO forecast price to RM2,750 per tonne

By Chester Tay / theedgemarkets.com | October 9, 2015 : 6:23 PM MYT

KUALA LUMPUR (Oct 9): [size=16]Morgan Stanley Research today raised its forecasted price for crude palm oil (CPO) to RM2,750 per tonne in 2016, implying a rally of more than 30% from today's spot price of about RM2,052 per tonne.

The research house upgraded the shares of Golden Agri-Resources Ltd ([You must be registered and logged in to see this image.] Valuation: 1.20, Fundamental: 0.55) and PT Astra Agro Lestari Tbk to "overweight" from "underweight" given their positive earnings sensitivity and stock price correlation to the higher forecasted price.

It said the reason behind the price increase is mainly due to the drop in production following the strong El Niño climate.

Morgan Stanley noted that the Asia region is four months into an El Niño, which the International Research Institute for Climate and Society and the Climate Prediction Center forecast to intensify and extend into early 2016.

If this unfolds, it would likely make this one of the longest and strongest El Niños of the past 40 years and probably most comparable to the strong El Niño of 1997–98.

"During that period world production of palm oil fell 4% year-on-year and pricing spiked 70%. Our new 2016 forecasts now call for a strong El Niño unfolding, which will result in 0% world production growth (cut from 4%) and lead pricing to rise 25% (up from 11%)," it said.

Morgan Stanley pointed out that it believes its new forecasts are materially different from consensus.

For example, the US Department of Agriculture forecasts 5% growth in world production for 2016 and July 2016 CPO futures to trade more than 20% below Morgan Stanley's new forecast of RM2,750 per tonne.

"We forecast global palm oil demand growth to rebound back to trend growth rates of about 6% in 2016 from just 2% growth in 2015," it said.

This year's growth rate was the slowest since the Asian financial crisis in 1997, and Morgan Stanley said this is purely attributable to the 15% contraction in biodiesel demand following the collapse in energy prices.

"However, now that the discretionary biodiesel user has exited the market, we believe growth can rebound as Indonesia moves towards its B15 blending mandate, which has the potential demand for 4.6 million tonnes of biodiesel," Morgan Stanley reckoned.
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