CPO to continue upward momentum

Malaysia’s palm oil production is poised for a rebound by about 6% YoY to 19.2m tonnes this year, analyst says 


PALM oil price, anchored by the benchmark three-month forward crude palm oil (CPO) futures contract on Bursa Malaysia Derivatives Bhd (BMD), is expected to sustain the rally on expectations of higher exports and weaker production levels amid tight stock levels. 

Singapore-based Palm Oil Analytics owner and co-founder Dr Sathia Varqa said 2021 and 2022 are set to be bullish years for the palm oil market with historic high CPO prices supported by fundamentals and significantly by sentiments. 

He expects Malaysia’s palm oil production is poised for a rebound by about 6% year-on-year (YoY) to 19.2 million tonnes in 2022 after plunging to the lowest level in five years in 2021. 

He said exports are predicted to recover from a low base in 2021 as economies across the world re-opened on the back of the higher vaccination rates against the Covid-19 virus. 

“As such, the CPO futures active month contract is expected to trend at RM4,800 to RM5,100 a tonne up to February. 

“Prices are expected to lower again starting from March at RM4,700 to RM4,500 and then decline further to RM4,200 to RM3,800 from May,” he told The Malaysian Reserve (TMR). 

Varqa expects prices will start easing from March onwards as production improves provided there are no major weather disruptions and more plantation workers are available and ready for harvesting work in May. 

A chartist with a local brokerage said the price chart for the benchmark CPO contract suggest prices could edge higher this week despite intermittent profit taking. 

“The day chart is very bullish and the price trajectory of the CPO contract on the BMD could go up further as the rally can attract more money as traders move some money out of the FKLI contract to the FCPO,” he told TMR. 

The Indonesian Palm Oil Association on Jan 19 revealed that Jakarta is drafting a plan to limit the shipments of the edible oil out of Indonesia to control surging domestic cooking oil prices. 

Analysts believe the decision by the world’s biggest producer of palm oil drove the CPO futures contract prices higher last week. 

The benchmark FCPO contract added RM196 week-on-week to end last Friday at RM5,323 a tonne as the news flow from the edible oil complex remained bullish. 

The Malaysian Palm Oil Board (MPOB) expects 2022 to be a good year for the Malaysian palm oil industry with all key industry indicators projected to show a better performance. 

Its DG Datuk Dr Ahmad Parveez Ghulam Kadir said CPO price is expected to average at RM3,800 per tonne this year on improved palm oil production, in line with the performance of other major vegetable oils prices amid the recovery in production and stock levels. 

“CPO production is expected to improve 4.9% this year to 19 million tonnes from 18.12 million tonnes recorded in 2021, while stock levels are projected to pick up 23.4% to 1.95 million tonnes versus 1.58 million tonnes at the end of last year. 

“We foresee exports to increase 9.3% to 17 million tonnes in 2022 from 15.56 million tonnes previously. 

“Export revenue, however, is expected to fall to RM95 billion compared to RM106.5 billion,” he said during a presentation at the one-day Palm Oil Economic Review and Outlook Seminar 2022 organised by the MPOB on Jan 13. 

He highlighted that the industry saw a mixed performance in 2021, where the slowdown in CPO production had limited the capacity for the country to export the commodity and other palm-based products despite demand from importers. 

In December, Malaysia experienced heavy rains which had caused severe floods in several states in Malaysia, the world’s second-largest producers of palm oil, forcing more people to evacuate to shelters. 

The states affected by floods includes Pahang, Kelantan, Terengganu, Johor, Melaka, Negri Sembilan and Sabah. All of them are Malaysia’s key palm oil-producing states. 

Plantation analysts forecast a minimal impact from the event in Peninsular Malaysia following a cursory check on plantations with exposures in the flood-affected states. 

Kenanga Investment Bank Bhd (Kenanga Research) said unless the heavy downpour continues and spreads for a continued period of time, the damage to oil palm trees should be minimal and yields immaterially affected. 

It added that oil palm loves rain and growers in Indonesia and Malaysia rely on the rain to thrive. 

Kenanga Research noted that many industry players have invested in infrastructure to cope with heavy rain and the palms are tough and can endure floods. 

The issue of labour shortage in the sector appear to being addressed as Putrajaya is expected to issue permits for more than 30,000 foreign workers for the plantation sector, although some analysts expect it may take some time. 

Varqa said the entry of foreign workers may trickle-in by batches starting from mid-February and the impact on production will be felt from May onwards. 

Despite the high CPO price, the sector stocks remain undervalued with RHB Investment Bank Bhd attributing it to the lack of investor interest due to environmental, social and corporate governance (ESG) concerns. 

Local institutions and foreign funds were net sellers in the tune of RM559 million of stocks from the plantation sector in 2021, according to a recent CGS-CIMB Securities Sdn Bhd report Due to the ESG issue, RHB maintained its ‘Underweight’ sector rating as it continues to expect the disconnect between CPO and share prices to remain, it stated in a sector report on Jan 11. 

Its top picks were Sime Darby Plantation Bhd with a target price (TP) of RM4.15 and top sells were FGV Holdings Bhd (TP of RM1.35) and Genting Plantations Bhd (TP of RM5.80). 

Maybank Investment Bank Bhd noted that the high fertiliser prices, disrupted fertiliser supplies and labour shortage in Malaysia may possibly cause palm oil yields to again come in below expectations in 2022. 

It advocates to stay ‘Positive’ on the sector and has a ‘Buy’ call on Kuala Lumpur Kepong Bhd (TP RM30.70), Sarawak Oil Palms Bhd (TP RM5.60) and Boustead Plantations Bhd (TP 93 sen).