The likelihood of a strong heatwave will give rise to CPO prices due to lower production
By SHAHEERA AZNAM SHAH / Pic By MUHD AMIN NAHARUL
Plantation companies are likely to record higher revenues in the fourth quarter this year as crude palm oil (CPO) prices are expected to recover from its three-year low in October.
MIDF Amanah Investment Bhd senior research analyst Alan Lim said CPO prices traditionally will track the performance of crude oil prices.
“We believe the price movements will be affected by the stronger crude oil price which in turns, will boost the demand of the biodiesel segment.
“Earnings of plantation companies should improve at the end of 2018 due to better price outlook for CPO,” he told The Malaysian Reserve.
Lim said CPO prices would also benefit from environmental factor like the strong heatwave, El Niño, which is predicted to raise the world’s temperature in the next several months.
“Currently, Aust ral ia’s Bureau of Meteorology is predicting a 50% chance of the heatwave to happen. However, the prediction is not strong enough to cause a movement in prices.
“But, if the likelihood increases to 70% or the prediction is definite, CPO prices will rise due to lower production,” he said, adding that the extensive price impact will allow companies to recoup from the lower production.
According to Moody’s Investors Service, the CPO prices, which have dipped 14% since early 2018, were at their lowest levels since October 2015.
It added that palm oil producers are likely to be weighed down with a credit challenge if CPO prices remain at the current levels.
“Continued weak CPO prices will challenge the credit metrics of the four palm oil companies that we rate over the next eight to 12 months, but the growing demand for palm oil will support their credit profiles over the medium to long term.
“We expect the governments of Indonesia and Malaysia, which together produce around 85% of CPO globally, to maintain supportive policies towards their respective palm oil industries and this will continue to provide a valuable underpinning for ratings in the sector,” it said.
According to Reuters, the palm oil futures rose marginally last Friday to a three week top of RM2,235 as the stockpiles were expected to plunge, while trading volume stood at 16,073 lots of 25 tonnes each at noon.
However, the palm oil futures dropped last Monday due to concerns over rising stockpiles which exceeded exports in September, said Reuters.
In August, RAM Rating Services Bhd said in its report that CPO prices are expected to sustain between RM2,200 and RM2,400 per tonne in the second half of 2018 (2H18), supported by demand from biodiesel and dimmed projection of the domestic production growth.
It added that India’s action to hike import duties on soybean oil in June 2018 is projected to reverse the downtrend in palm oil exports for Malaysia and Indonesia.
In 1H18, CPO prices had averaged at RM2,421 per tonne.