Declining inventory coupled with the govt pursuing the biodiesel mandate will support slightly higher prices for the short term

by SHAHEERA AZNAM SHAH/ pic by BLOOMBERG

THE rally in the price of crude palm oil (CPO) has the legs to sustain until early 2020, as the supply shortage heightens coupled with the government’s mandate to implement the higher percentage of CPO in its biodiesel programme.

CGS-CIMB Securities Sdn Bhd head of research Ivy Ng estimates the CPO price to extend between RM2,700 and RM2,800.

“It is possible the rally could sustain for a short term between two and three months as there are concerns of limited supply, coupled with the government pursuing the biodiesel mandate.

“The combination of these and the declining inventory will support slightly higher prices for the short term,” she told The Malaysian Reserve.

The edible oil’s price has been on a bearish phase since 2017, bottoming out at RM1,718 in November as inventory levels surpassed three million tonnes.

The improved sentiment for the sector is reflected in the Bursa Malaysia Plantation Index which rose for the fifth day, last Friday, gaining 0.52% or 36.85 points to 7,178, as investors bought into the sector expectations of improved financial performances from companies led by Kuala Lumpur Kepong Bhd’s (KLK) improved fourth quarter ended September) performance. The index, however, remains 4.67% below its 52-week high on Feb 20, 2019, and 11.3% above its low on Dec 18, 2018.

Ng warned the price rally could result in a progressively lower demand if it exceed RM2,500 per tonne.

“There will be an impact on demand, such as for biodiesel and food demand. Over time our exports of palm oil products could be lower than what it is today.

“If the prices rise extensively, it could result in demand destruction. In certain markets, people may see the price as too expensive and they would not buy as much. It will not be immediate, but you can see the demand drop slowly,” she said.

Hong Leong Investment Bank Bhd (HLIB) has raised its estimation for CPO price for financial year 2020-2021 (FY20-FY21) to RM2,400 per tonne, a RM200 increase per tonne year-on-year.

It also has upgraded the plantation sector to ‘Overweight’.

The research house also raised the core net profit forecast for the plantation counters under its coverage in FY20-FY21 due to higher CPO price and its projection of the event sustaining into 2020.

“We are turning more positive on the plantation sector, as we believe the current positive CPO price sentiment will sustain into 2020 due to supply constraints arising from potential palm production deficit in Malaysia and Indonesia, lower soybean output in the US and more positive demand prospects arising out of higher biodiesel mandate in Malaysia and Indonesia from 2020 onwards,” HLIB stated.

It added that the price gap between palm oil and soy oil has narrowed to about US$75 (RM312.91) per tonne from the historical fiveyear average US$100 tonne.

“We believe the price spread between the two will likely remain, if not narrow further, as the African swine flu outbreak and biodiesel mandate in Malaysia and Indonesia will continue to drive palm oil consumption,” it said.

HLIB has recommended FGV Holdings Bhd for ‘Buy’ with a target price of RM1.42, Genting Plantations Bhd (‘Buy’ with RM11.18), Hap Seng Plantations Holdings Bhd (‘Buy’ with RM1.68), KLK (‘Buy’ with RM24.37) and TSH Resources Bhd (‘Buy’ with RM1.05).