KENANGA Investment Bank Bhd (Kenanga) has cut the average crude palm oil (CPO) price assumption in 2023 by 5 per cent to RM3,800 from RM4,000 per tonne.

In a research note, the investment bank said the production cost is also expected to be higher and structurally stickier, dampening future margins further.

“We project CPO prices to stay elevated at an average of RM3,800 per tonne in 2023, five per cent lower than RM4,000 we previously assumed on the back of edible oils such as palm oil are basic consumables needed for day-to-day living.

“Also, resumption to more normalised growth in the 2023 edible oil market after staying flattish since 2020 and anticipated supply improvement into 2023 is likely to serve recovering demand rather than lifting inventory significantly while firm existing fossil fuel prices are supportive of biofuel offtake,” it said.

The investment bank said supply is also recovering but fragile amid the disruption caused by the Ukraine conflict on sunflower output and overall edible oil supply should still inch up by one-two per cent in 2022.

“Palm oil output is also expected to grow despite labour shortages constraining Malaysia output to levels achieved in 2021,” it said.

It said cost inflation is more structural and stickier with higher operating costs from labour, fertiliser to transportation and was a key reason for the poorer-than-expected recent Q3 2022 results across the plantation sector.

“Net zero journey has started. Supporting oil palm’s competitiveness and environmental credential thus far has been its high oil yield.

“This translates to the much smaller environmental footprint when compared to other oil crops,” it said.

Nevertheless, it said the plantation sector remained a defensive sector with undemanding ratings.

“Poorer financial year 2023 CPO prices and earnings are largely priced yet the sector’s balance sheet is asset rich, not highly geared, Shariah-compliant (9.6 per cent of FBM Shariah Index and 9.4 per cent of FBMKLCI) and palm oil is used worldwide as food or fuel,” Kenanga added. — Bernama / pic TMR