CPO prices to remain high until year-end

However, total exports in 2021 is expected to decline by 6.3% to 16.3m tonnes due to tight supply availability


CRUDE palm oil (CPO) prices are likely to remain high for the remainder of the year on stronger demand, but exports could contract as production decline looms.

Malaysian Palm Oil Board DG Dr Ahmad Parveez Ghulam Kadir told The Malaysian Reserve that palm oil prices in 2021 is expected to average at RM4,100 per tonne, increase by 52.7% compared to RM2,685 in 2020 due to expected lower CPO production.

“Meanwhile, palm oil demand is expected to be stronger in 2021 as consuming countries are expected to replenish vegetable oil stocks. However, the decline in production is expected to limit the quantum of exports.

“Thus, total exports in 2021 is expected to decline by 6.3% to 16.3 million tonnes against 2020 due to tight supply availability. For next year, we are still reconsidering as the situation this year is still not clear with many surprises,” he said.

MIDF Amanah Investment Bank Bhd analyst Shahira Rahim maintained the plantation sector’s ‘Positive’ call with calendar year 2021 (CY21) CPO target price of RM3,600 per metric tonne.

“We believe the palm oil supply tightness situation will likely remain at least until the end of this year, given limited recovery of yield due to shortages of skilled harvesters, better demand outlook on the back of better economic activities locally and globally, and upcoming La Nina weather phenomenon.

“On the demand front, we believe replenishment activities to import more palm oil will continue to be healthy, bolstered by upbeat activities in the HORECA segment in China and India.

On another note, price-wise, we anticipate that the CPO prices will remain favourable in the fourth quarter of CY21 supported by tight inventory supply in our local plantation industry,” she said in a research report yesterday.

RHB Investment Bank Bhd (RHB Research) analyst Hoe Lee Leng said CPO prices continue to stay high, having crossed the RM5,000 per tonne mark recently, although there were no fundamental changes to trigger this spike, other than the crude oil price movement.

“We believe this jump may be short-lived, as we continue to expect next year’s fundamentals of supply to improve, with a moderation of CPO prices in 2022,” she said.

Hoe noted that the main risk to this thesis is weather abnormalities. However, share prices have, for the first time this year, started moving in tandem with CPO prices.

The research house believes now is the time to ride the wave, and wait for a good opportunity to lock in some profits.

She also noted that gas oil prices rose by 17% over the last one month to US$91 (RM378.56) per barrel recently.

This also resulted in CPO prices rising, leading to a still highly positive palm oil-gas oil gap of US$67 per barrel (US$490 per tonne) — so discretionary biodiesel is still not feasible.

According to the RHB Research’s recent report, for the month of September, Malaysia’s CPO output was flattish while stocks fell 7% to 1.75m tonnes.

“With CPO prices currently at a peak, and some strength being seen in share prices, we advise investors to ride the wave and look for opportunities to sell into strength, as we still expect to see prices and, therefore, earnings decline year-on-year (YoY) in 2022,” said Hoe.

September production was flattish monthon-month (MoM) at 0.3%, as West Malaysia’s decline (4.6%) was offset by rises in Sabah (5.6%) and Sarawak (4.2%). Hoe said production should rise in the next couple of months in the peak season.

Exports grew 36.8% MoM in September to 12.1% YoY, after the low in August with major MoM spikes coming from China (70.5% MoM), the European Union (24.8% MoM) and India (21.4% MoM). Inventory levels fell to 1.75m (7% MoM).

RHB Research maintained its ‘Underweight’ call on the sector, its top picks are Wilmar International Ltd, PT PP London Sumatra Indonesia Tbk, Sarawak Oil Palms Bhd Group of Cos and Ta Ann Holdings Bhd. RHB believes that — in the wake of improving fundamentals and moderating prices in 2022F — earnings will soften YoY.

Meanwhile, environmental, social and governance concerns will still impact sector valuations. However, RHB may need to review its 2022 price assumptions, should prices remain lofty for a longer period than expected.

CGS-CIMB Securities Sdn Bhd analyst Ivy Ng Lee Fang expect CPO prices to stay firm in October ahead of festive demand as average CPO price was flattish MoM but rose 56% YoY to RM4,555 per tonne in September on concerns of tight edible oil supplies.

“We think palm oil exports could remain fairly strong in October due to the Diwali festival. We project CPO prices remaining firm at RM3,500 to 4,500 per tonne in the October 2021 forecast.

“We maintained our average CPO price forecasts of RM3,700/RM2,900/RM2,800 per tonne for 2021F/2022F/2023F and reiterated its ‘Neutral’ call, and like Kuala Lumpur Kepong Bhd, Genting Plantations Bhd and Hap Seng Plantations Holdings Bhd,” she added.