Sinarmas Sekuritas | Market Outlook 2019 | Our view on commodities:

In FY18, coal price has diverged between the premium and the lower grade coal. While the premium coal price benchmark (Newcastle 6,322) went up by 1% YTD by the time of this writing to USD 101 per ton, the medium grade (Newcastle 5,500) fell by 21.8% YTD and traded at USD 61 per ton. Discount spread between the two has widened to 40% (or USD 40 per ton) from the 4-year mean of 18% (or USD 17 per ton). We think the combination of shifting demand to better quality products, tighter supply of the premium grade coal, and implementation of DMO regulation are responsible for the phenomenon.

Meanwhile, we see softer coal demand in the next few quarters as we expect China import to decline in FY19F on the back of: 1) slower economic growth in FY19F, 2) rising domestic supply due to higher local output, and 3) relatively high inventory level. Overall, given the potentially weak demand and modest supply growth, we see stronger
headwind than tailwind for coal price going forward. Hence, we expect lower coal price in FY19F with discount spread continues to persist in the medium term and narrow in the longer term.

Oil: supply-demand conundrum

After the 21.8% gain during the first nine months of 2018, oil declined by 33.0% from its peak in Oct-18 to USD 45 per barrel. In the space of about a month, investors (and traders) are turning bearish on oil as: 1) US production reached all time high while OPEC recorded its highest output in the past two years, 2) US granted a waiver on Iran sanction, allowing the country to export limited amount of oil to eight major countries including China and India, and 3) weakening global growth raises concerns on demand, while increasing US shale output may fuel the supply glut concern leading to potentially oversupply condition in FY19F.

OPEC and its allies, however, agreed to cut their oil production in response to higher US shale output and weakening global demand growth; OPEC and its allies agreed to cut production by 1.2 million bpd in 1H19. Meanwhile, as oil price has fallen significantly, we see possibility for US to potentially revoke the temporary waiver on Iran early and halt all purchases of crude oil from Iran globally. This, if implemented, should remove around 1 million bpd of supply from the market. Be that as it may, we think recent oil price correction was overdone and oil price is undervalued despite the potentially lower demand ahead. We see combination of OPEC production cut, Iran temporary waiver revocation, and lower output from Venezuela to support oil prices. To add, rising tension between Russia and Ukraine may come as a black swan event to oil price.

Nickel: ready to ride the EV revolution

At the time of this writing, nickel price has declined by more than 15% YTD
despite the widening nickel deficit and continuous downfall in inventory. This suggests a fundamental mismatch in our belief. On one side, demand has grown substantially in the past three years driven by rising demand from stainless steel and battery industries. On the other, rising demand and price have not led to higher output which resulted in continuous nickel deficit and inventory in the past three years. YTD, global nickel inventory has plunged by 154k tonnes (dn 41.9% YTD), recorded at just over 210k tonnes (vs 368k tonnes in FY17).

The last time we see inventory standing at current level was when nickel was traded at USD 13,000-14,000 per ton, far above current level. In our view, while the global nickel deficit may continue to persist next year, we expect the deficit narrow. Moreover, we expect long-term demand for nickel batteries to drive the nickel price going forward. Overall, we see more upside than downside risks for nickel price backed by continuous downfall in inventory and global output deficit. Thus, we believe current nickel price is below the fair value and remain optimistic on the long-term outlook.

CPO: sensing positive breeze

Throughout FY18, CPO prices have continued to drop and reached its lowest level of MYR 1,759 per ton in Nov-18 as production continued to increase while demand remained soft, thus resulting in higher stockpiles. As for FY19F, however, positive breeze may be seen in CPO price as we expect a pick up catalyzed by several reasons.

Firstly, a more balanced supply-demand of CPO as production is expected to be moderate in the upcoming years. Second, supportive regulations from both Indonesia and Malaysia such as zero levy CPO export tax. Third, biodiesel mandate as a game changer for plantation industry and boost CPO demand in the future. In all, we turn bullish on the industry and expect CPO price to trade at MYR 2,000 – 2,500 per ton in FY19F.


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