CPO prices to hover around RM2,500 by year-end as demand recovers

We expect demand for palm oil in food consumption to improve due to the Mid-Autumn Festival and demand recovery from the Horeca sector


CRUDE palm oil (CPO) prices are expected to rise to around RM2,500 towards the end of the year as demand in food consumption recovers, particularly boosted by the hospitality industry.

CGS-CIMB Securities Sdn Bhd analyst Ivy Ng raised her average CPO price forecast for 2020 to RM2,500 per tonne from RM2,300 per tonne previously.

“We expect demand for palm oil in food consumption to improve ahead of the celebration of the Mid-Autumn Festival on Oct 1, 2020, and due to demand recovery from the hotel, restaurant and cafe (Horeca) sector.

“The rally in spot CPO prices from its year-to-date low of RM2,021 per tonne on May 12 to its high of RM2,936 per tonne on Sept 3 was due to concerns on tight global inventories as supply from Indonesia was below expectations in the second quarter of 2020 (2Q20),” she said in a report last Friday.

As oil palm cultivation enters the peak harvesting season, Ng expects supply to grow by 2% month-on-month (MoM) in September to 1.9 million tonnes, while stockpiles are projected to increase by 2% MoM to 1.73 million tonnes.

However, Ng said the rising CPO prices could worsen the economic viability of biodiesel consumption and could affect the fulfilment of the B30 biofuel programme in Indonesia, which is expected to kick off in 2021.

For the month of August, Malaysia’s CPO inventory remained flat MoM at 1.7 million tonnes, but fell 24% on an annual basis. The figure was 6% below CGS-CIMB’s forecast, due to lower than expected output.

Meanwhile, production of the vegetable oil increased by 3.07% MoM and 2% year-on-year (YoY) to 1.86 million tonnes from 1.81 million tonnes the month before.

“The stockpile will likely keep CPO prices supported in the short term on concerns over tight supply in key producing and consuming countries of palm oil.

“To put things in perspective, over the past 10 years, the average palm oil stock level at end-Aug for Malaysia was around 2.06 million tonnes,” Ng said.

She said the increase in CPO production could be due to seasonal trends. The research firm has raised its forecast for supply levels of the oil to 19.58 million tonnes for 2020, up 2% from the previous year.

Exports of palm oil fell 11% MoM and 9% YoY to 1.58 million tonnes in August, possibly due to the climbing trend of CPO prices.

“Palm oil exports fell due to weaker demand from all key countries except China, and rising CPO prices, which may have affected the affordability of palm oil in some markets.

“Given that CPO inventory levels in China and India remain below their historical average, we expect palm oil exports from Malaysia to remain fairly healthy until a more significant pick-up in Indonesia’s palm oil output is evident,” Ng said.

CGS-CIMB’s top picks for the plantation sector are Genting Plantations Bhd, Hap Seng Plantations Holdings Bhd and Ta Ann Holdings Bhd, with target prices of RM10.70, RM1.85 and RM3.17 respectively.