Strong CPO price trend expected to weaken

There will be strong resistance for CPO prices to go up further as production recovery likely amid higher production cycle


CRUDE palm oil (CPO) prices, which are at 13-year high, are not expected to remain high for a sustained period as a recovery in production levels in the months ahead should pressure prices lower, according to analysts.

CPO price closed at a fresh high of RM4,053 a tonne for the benchmark month on Bursa Malaysia Derivatives Exchange yesterday, up RM79 for the day and RM315 for the week.

The spike in price comes as palm oil inventories fell in February as production dropped unexpectedly, while exports declined to a 14-year low, according to Public Investment Bank Bhd (PublicInvest).

“The strong CPO price trend has indeed surprised the market given the persistent low inventory levels. Nevertheless, we think there will be strong resistance for CPO prices to go up further as we see a production recovery soon amid higher production cycle,” the investment bank stated.

Despite the sharp rise in product price, PublicInvest remains neutral on the sector and prefers pure upstream players like Sarawak Plantation Bhd, TSH Resources Bhd and Ta Ann Holdings Bhd to benefit from the upswing in the prices.

In contrast to market expectation, palm oil inventories in February contracted 1.8% month-on-month (MoM) to 1.3 million tonnes, mainly due to a decline in production and a pickup in domestic consumption.

Stock-to-use ratio was down marginally from 9% to 8.9%.

Palm oil exports, which fell the most in January, saw a further decline of 5.5% to 900,000 tonnes, which was also the lowest export level since 2007.

Exports to China eased by 26.1%, India (1.4%), Pakistan (45.7%) and the US (53.1%). Meanwhile, exports to the European Union rose 11%.

“The weaker demand was likely attributed to a shorter working month with China having a long holiday break during the Chinese New Year. There is little sign of export demand picking up this month as data has shown palm oil exports dropping 22% in the first 10 days,” PublicInvest added.

CPO production in the country softened by 1.9% MoM to 1.1 million tonnes — the lowest since February 2016 despite expectations of a recovery.

Production in Peninsular Malaysia was up 6.9%, while East Malaysia dipped 11.3% last month. The steep decline in East Malaysian production was due to the severe worker shortage as foreign workers returned to their home countries through various channels.

Hong Leong Investment Bank Bhd (HLIB) analyst Chye Wen Fei said while high palm oil prices will result in weaker demand from price-sensitive importing countries such as India and Pakistan, this will likely be offset by low palm oil production that arises from labour shortage, resulting in stockpile remaining at low level in coming months.

“We maintain our CPO price assumption of RM2,700 per tonne for 2020-2022. We believe CPO price will remain elevated through the first quarter of 2021 (1Q21).

“Beyond 1Q21, we anticipate CPO price to soften, on the back of better supply outlook for major edible oils, based on the assumptions that labour shortage in Malaysia will gradually ease from 2021 onwards, which will result in more balanced demand-and-supply dynamics,” said Chye.

The investment bank has maintained a ‘Neutral’ rating on the sector with top picks include Hap Seng Plantations Holdings Bhd with a ‘Buy’ call and target price (TP) of RM2.17, IJM Plantations Bhd (‘Buy’; TP: RM2.29) and TSH Resources (‘Buy’; TP: RM1.35).

MIDF Amanah Investment Bank Bhd (MIDF Research) also maintained its ‘Neutral’ stance on the sector with unchanged CPO TP for calendar year 2021 of RM2,700 per million tonne.

MIDF Research expects inventory level to stay below the two million tonnes level in view of the slower production period and believes the palm oil supply tightness situation will likely remain until 1Q21, given the weaker output during the post-peak production.

It anticipates the effects of the Covid-19 pandemic to subside in the second half of the year given Malaysia has rolled out its first batch of Covid-19 vaccines last month and relaxed the Movement Control Order rules.