CPO prices to remain elevated amid Russia-Ukraine crisis

by AZALEA AZUAR / pic by BLOOMBERG

MIDF Research has maintained a ‘Positive’ call on the plantation sector on stronger crude palm oil (CPO) prices that is expected to remain until the first half of the year.

CPO price is expected to stay elevated on slower production growth, ongoing labour shortages, bullish demand, the drought in South America, Indonesia’s new export rule and the current Russia-Ukraine war.

In the intermediate term, MIDF expects the stockpiles of Malaysia’s palm oil to remain on downtrend mainly due to seasonally lower production cycle of palm oil.

“Despite our bullish view on the sector’s outlook, we remain concern on the fresh fruit bunches (FFB) production as most of the companies under our coverage recorded lower FFB production in the current quarter.

“Going ahead, we expect production levels to slightly improve in the coming months following better weather conditions and the returning of foreign workers to Malaysia’s plantation industry. However, we opine that the production level will not fully recover due to the lagging effect of cutback on fertiliser application, by the smallholders in late 2HCY18,” said MIDF.

CPO price has increased aggressively in early February to breach RM8,000 a tonne, which is also at an all-time high due to supply tightness.

In line with the aggressive increase of CPO price in early February, the KL Plantation Index has started to reflect the high price of CPO.

“To recap, the KL Plantation Index was around 6,000 levels last year until January 2022. In February 2022, we noticed that KL Plantation Index has reached 7,000 level and last week, it has reached 8,000 levels. Aside to that, it is interesting to note that based on our observation we saw significant inflows from foreign investors to our plantation players since early February 2022,” the report stated.

In regards to the Russia-Ukraine crisis, MIDF foresees that the price of edible oil will increase on the back of supply concerns.

“We do note that Ukraine and Russia are the biggest suppliers of sunflower oil and it is also the second most imported edible oil from India, after palm oil. Hence, this is positive to our CPO export as we think that the supply disruption of sunflower oil will eventually lead to higher demand for palm oil from India, which is also our top buyer,’ said MIDF.

As for the export front, MIDF does not expect that Russia-Ukraine crisis will have any severe negative impact on Malaysia palm oil and will continue to maintain its healthy export demand given that our top buyers are from India and China.

Ukraine and Russia only accounted for 0.3% and 0.1% of Malaysia’s palm exports respectively.

MIDF maintained positive on the sector with revised CY22 CPO target price of RM3,000/metric tonne (MT).

“We believe the palm oil supply tightness situation will likely remain at least until 1HFY22. On the demand front, we believe replenishment activities to import more palm oil will continue to be healthy into CY22 on the back of more reopening of economic activities. On another note, pricewise, we anticipate that the CPO price will remain elevated,” the research outfit said.

MIDF top picks are Kuala Lumpur Kepong Bhd, TSH Resources Bhd, Ta Ann Holdings Bhd and Sime Darby Plantation Bhd.