By SHAZNI ONG / Pic By TMR File

KENANGA Research is positive on the plantation sector for the first quarter of 2019 (1Q19) as signs are pointing towards a sharp recovery in crude palm oil (CPO) prices.

Its analyst Lavis Chong said stockpiles in the country and Indonesia are expected to fall in coming months as production slows down seasonally.

“On the demand front, we believe that there will a notable pickup in 1Q19 coming from: i) China due to higher festive consumption during Chinese New Year; and ii) India as import duty is set to be revised downwards from 44% to 40% effective Jan 1,” he said.

Chong said, recently China has resumed purchases of US soybeans on a large scale, boding well for soybean oil prices and consequently CPO prices, given their high correlation.

“Riding on these factors, we expect CPO prices to improve to RM2,300-RM2,400/metric tonne (MT) by the end of 1Q19, and edge up further to RM2,500-RM2,600/MT in 2Q19, as stockpiles continue diminishing amid low production season, before retracing to RM2,200-RM2,300/MT in the second half of 2019 when output picks up again,” he said.

Overall, the research house forecasts 2019 CPO price at an average of RM2,400/MT, representing a year-on-year (YoY) increase of 7%.

“Nevertheless, we caution that February’s results season could be a hurdle, as lower CPO prices are likely to overshadow production pickups in 4Q18,” he added.

As such, Kenanga Research maintained its ‘Neutral’ rating on the sector with the possibility of upgrading to ‘Overweight’, if the following catalysts — namely, the easing trade tensions between the US and China; the higher exports of Indonesian CPO to the European Union; and the falling stockpiles in both Malaysia and Indonesia — take form.

On a separate but related note, the research firm pointed out that Indonesia has recently signed the Comprehensive Economic Partnership Agreement with the European Free Trade Association, which would grant Indonesian palm oil easier market access to Iceland, Norway and Switzerland.

“As Indonesia begins to focus on fulfilling the newly created demand, it could create opportunity for Malaysian planters to fill the gap in other export markets,” Chong said.

He added that an El Niño event will cause a dry spell in South-East Asia, which can result in bunch failure and floral abortion, among others.

“If the event plays out to be a severe one, CPO production could be disrupted and reduced by 5%-10% below the normal level, which would typically lead to a run-up in CPO prices amid a tighter supply environment.

“Should the price factor outweigh production deficiency, which is normally the case, Malaysian planters could benefit and report favourable earnings,” he said.