The positive production outlook is based on the assumption of normal weather and additional manpower supply 

by ASILA JALIL / Pic by TMR FILE PIX

CRUDE palm oil (CPO) prices are expected to move lower in the coming months after recent multiple highs as the production outlook improves from March onwards. 

Co-founder of Singapore-based Palm Oil Analytics Sathia Varqa said the positive production outlook is based on the assumption of normal weather and additional manpower supply. 

“Recovery in yields should show a meaningful increase in output after five months of lacklustre performance to January 2022,” he told The Malaysian Reserve in an email response recently. 

The CPO futures contract prices reached a new high of RM5,773 per tonne yesterday on follow through buying by traders on expectations the move by Indonesia to introduce new export rules and lower import duty by India could spur more bullish demand in an already tight edible oils market. 

On Jan 27, Indonesia — which is the world’s largest palm oil producer — issued a mandate under its domestic market obligation for palm oil producers to set aside 20% of their products for domestic use as part of a measure to manage the high domestic edible oil prices. 

The mandate requires palm oil to be sold at a price ceiling of 9,300 rupiah per kg for CPO and 10,300 rupiah (RM3.02) per kg for palm olein. 

Varqa said the stabilisation in Indonesian export flow after the recent measures should see some easing of the tight global supply situation. 

He noted palm olein must ease further to remain competitive to other oils particularly soybean oil and sunflower oil which are currently the favoured oils in key destination markets. 

Although consumers have complained of a shortage of palm oil on shelves, Malaysia, however, is not expected to follow Indonesia’s footsteps of limiting exports for domestic use due to smaller domestic market population as well as attractive international prices, said Varqa. 

“Malaysia’s domestic consumption is 3% of total supply compared to Indonesia’s 21%,” he said. 

According to the Malaysian Palm Oil Council palm oil trade statistics, Malaysia’s export of CPO stood at 4.56 million tonnes in 2021 and 11 million tonnes of processed palm oil. 

The Malaysian Palm Oil Board expects exports of palm oil to increase 9.3% to 17 million tonnes this year. 

The board also anticipates CPO production to improve 4.9% this year to 19 million tonnes from 18.12 million tonnes recorded in 2021 despite the labour shortage in the industry, while stock levels are projected to pick up 23.4% to 1.95 million tonnes from about 1.55 million tonnes as at end January, which is at six-month lows. 

Despite the positive outlook, the industry should be cautious of the effects of the ban of palm oil products by the US Customs and Border Protection. 

Varqa said in the short term, the impact will be on sales depending on the extent of the exports of palm oil products to the US. 

“But in the long run, it is reputational damage if the issues are not tackled or addressed holistically,” he added. Exports to the US look set to fall as the country seeks to phase out the use of palm oil in biofuels by 2023. 

MIDF Amanah Investment Bank Bhd expects stockpiles of palm oil to remain on a downtrend mainly due to the seasonally lower production cycle of palm oil in the first quarter (1Q). 

“Expectation of weaker production in the 1Q of 2022 will keep inventory levels below two million tonnes. Going ahead, we expect the production level to slightly improve in the coming months following the return of foreign workers to Malaysia’s plantation industry. We expect a significant recovery in production levels starting in 2Q,” the bank noted in a recent release. 

Given the price rally, analysts are expecting positive earnings surprises for the fourth quarter financials of plantations companies due this month. Kuala Lumpur Kepong Bhd is set to release its results today and set the benchmark for its peers in the industry. 

Public Investment Bank Bhd believes pure upstream plays like Ta Ann Holdings Bhd and Sarawak Plantations Bhd would benefit more from the CPO price rally. 

RHB Investment Bank Bhd, however, warned environmental social and governance concerns would keep valuations of plantation stocks disconnected from the earnings gains they may make from the improved pricing power they are currently enjoying.