CPO price to remain elevated on tight supply

By HARIZAH KAMEL / pic by TMR FILE

MALAYSIAN palm oil inventory is expected to stay below two million tonne levels in view of the slower production period, MIDF Amanah Investment Bank Bhd stated in a report yesterday.

“We believe the palm oil supply tightness situation will likely remain until the second quarter of 2021 (2Q21), given the weaker output during the post-peak production,” it said.

Nonetheless, the research outfit expects production to recover in the second half of 2021 (2H21), though below potential, given Malaysia’s high reliance on foreign workers.

On the export demand front, MIDF posits export demand will recover on the back of recovery of economic activities globally, higher export demand from China as red palm oil is allowed to enter the market following the approval of new standards for premium palm oil.

“We expect higher export demand from Saudi Arabia as Malaysia has clinched a palm oil deal. In the futures market, crude palm oil (CPO) price has rallied to its highest in over 10 years at above RM4,000 per tonne amid strong market sentiment and the price rally in the soy oil market,” it added.

Malaysia’s palm oil inventory increased by 7.1% month-on-month (MoM) to 1.55 million metric tonnes (MT) in April 2021, but CPO price remains elevated due to anticipated supply tightness.

On a year-on-year (YoY) basis, stockpiles plunged by -23.7% on the back of lower opening stock of 1.44 million MT.

The inventory level came higher than consensus expectations with a variance of +7.4% MoM and despite the higher volume of export demand in April, the level of inventory still recorded higher volume.

MIDF maintained its positive stance on the plantation sector with calendar year 2021 (CY21) CPO target price (TP) of RM3,000 per MT.

“We are anticipating tight soybean supply to lead to stronger soybean prices which in turn, should drive CPO selling price higher. On top of that, the subdued inventory level of palm oil in Malaysia would also act as a catalyst to CPO price,” noted MIDF.

Hong Leong Investment Bank Bhd (HLIB) retained its CPO price assumptions of RM3,200 per MT for 2021 and RM2,800 per MT for 2022-2023.

Its analyst Chye Wen Fei said CPO price will remain elevated at above RM3,500 per MT mark in 2Q21 and trend down more noticeably in 2H21, on the back of better soybean supply outlook and seasonally stronger palm oil output.

“Stockpiles in Malaysia will likely remain low in May, as we believe potentially weaker exports demand from India will likely be mitigated by resilient demand from China and seasonally weaker output,” said Chye.

HLIB also kept its ‘Neutral’ rating on the sector, as it believes the current high CPO price will not sustain over the longer term.

Its top picks are IOI Corp Bhd with a ‘Buy’ call and TP of RM4.67, Kuala Lumpur Kepong Bhd (‘Buy’; TP: RM26.64), and IJM Plantations Bhd (‘Buy’; TP: RM2.31).

Public Investment Bank Bhd (PublicInvest) has maintained a ‘Neutral’ call on the sector and its top picks are Sarawak Plantation Bhd, Ta Ann Holdings Bhd and TSH Resources Bhd.

PublicInvest anticipates a strong set of quarterly results for 1QCY21 with 1Q21 CPO prices averaging at RM3,925 per MT, a significant increase of 47% YoY compared to 1Q20’s RM2,664 per MT.

Among plantation stocks under its coverage, only Genting Plantations Bhd, IOI Corp and Ta Ann registered weaker CPO production during the quarter.