CPO price to remain elevated in 1Q22

The seasonally lower production cycle is expected to last until 1Q22 which bodes well for near-term CPO price 


THE price of crude palm oil (CPO) is expected to remain elevated until the first quarter of 2022 (1Q22), supported by the La Nina phenomenon and seasonally lower production cycle. 

Hong Long Investment Bank Bhd (HLIB) analyst Chye Wen Fei stated the La Nina phenomenon will likely affect soybean output in South America due to the lack of rainfall. 

The seasonally lower production cycle is expected to last until 1Q22 which bodes well for near-term CPO price. 

“Historically, prices of CPO and soybean tend to strengthen as La Nina and El Nino phenomenon sets in and weaken when the weather anomaly subsides,” Chye wrote in a note yesterday. 

The analyst forecast the edible oil’s price will start trending down from 2Q22 onwards due to several factors. 

“CPO price will start trending down from 2Q22 onwards on the back of increased optimism on major vegetable oil output prospects (including palm oil and soybean), higher inventories in major vegetable oil-consuming countries (China and India) and palm’s narrow discount against soybean oil,” she stated. 

Chye, however, noted the pace of CPO price decline may turn out to be slower than expected. 

She opined a meaningful pullback in CPO price would only materialise when palm oil output recovers, which in turn hinges on several uncertainties including the delayed entrant of foreign workers into Malaysian due to Omicron’s restriction. 

“Surging fertiliser prices which may result in planters, particularly smallholders reducing fertiliser application to oil palms, hence derailing the anticipated yield recovery,” she said. 

The analyst maintained the assumption for CPO price in 2022 to 2023 at RM3,500 per metric tonnes (MT) and RM2,900 per MT respectively. 

“We anticipate supply of vegetable oil to remain tight for the next few months and a more noticeable decline in CPO price would only happen when supplies of vegetable oil, particularly palm oil and soybean start showing signs of recovery by 2Q22,” she added. 

She noted the share price underperformance of plantation companies was probably due to the factoring of environmental, social and governance (ESG) concerns rising from forced labour allegations on Sime Darby Plantation Bhd and FGV Holdings Bhd. 

The KL Plantation Index (KLPLN) fell 10.3% in 2021, underperforming the Kuala Lumpur Composite Index by 6.6% points. 

“Against the CPO spot price, the KLPLN Index underperformed by an even bigger margin by 45.3% points, and we believe this is largely due to ESG concerns within the sector,” she said. 

Chye believes ESG concerns have already been reflected in the sector’s valuations, as most players have been putting efforts into rectifying the issues and foreign shareholdings are at a multi-year low level. 

“We maintain our ‘Overweight’ stance on the sector, underpinned by good near-term earnings prospects arising from high CPO prices and commendable valuations,” she noted. 

HLIB’s sector ‘Buy’ are for IOI Corp Bhd with a target price (TP) of RM4.35, followed by Kuala Lumpur Kepong Bhd (TP: RM25.62), Sime Darby Plantation (TP: RM5.03) and TSH Resources Bhd (TP: RM1.35).