CPO prices seen to be firmer

PETALING JAYA: Rising crude palm oil (CPO) prices, which have hit a 13-year high, may have peaked as further upsides could be capped by increases in inventory levels.

Malaysia’s palm oil inventories rose to their highest level in four months in March, gaining 11% month-on-month to 1.45 million tonnes.

The growth, naturally, beat the consensus forecast. The benchmark palm oil futures closed up RM76 at RM3,726 per tonne yesterday.

TA Securities in a report yesterday said it remains cautious about a possible pullback in CPO prices in the second half of 2021. “However, we still expect the average CPO price for 2021 to be firmer and higher than 2020.

“We raise our CPO price assumptions for 2021 and 2022 by 15% and 17%, respectively, to RM3,000 per tonne and RM3,050 per tonne from the current RM2,600 to reflect weaker-than-expected low palm oil stockpiles, relatively tight global edible oil supplies and the rise in crude oil prices, which bode well for biodiesel.”

The research house added that it expects palm oil stockpiles to stay tight until the end of the current quarter. “Malaysia’s palm oil stockpile has been falling below the two-million-tonne benchmark since January 2020, mainly due to weak production. The shortage of foreign labour, coupled with the unfavourable weather pattern have adversely affected the palm oil harvesting frequency and production.

“We expect the palm oil inventory to stay tight until the second quarter of 2021 due to continuous travel restrictions and border closures, which will not solve the current shortage of harvesters.”

Going forward, TA Securities said stockpiles are expected to improve, underpinned by the effective rollout of the Covid-19 vaccination programme and the reopening of borders in the second half of 2021.

UOB Kay Hian in its report said Malaysia’s palm oil inventory is likely to continue building up, as trees are entering the high crop season.

It added that exports are not anticipated to be as strong, however, due to price competition from Indonesia.

“Palm oil prices are starting to see downside pressure from stock rebuilding. Our CPO price assumption is RM3,000 per tonne for 2021 and we remain concerned about potential price weakness due to the production recovery.

“In addition, we are also concerned about the earnings leverage of CPO prices, as high prices may not be reflected in the companies’ earnings if they had locked in forward sales at a lower pricing towards end-2020.”

In view of this, UOB Kay Hian said it prefers companies with higher upstream exposure in Malaysia.

“We prefer pure upstream players with only Malaysia-skewed operations, such as Hap Seng Plantations Holdings Bhd, Sarawak Oil Palms Bhdimage and Kim Loong Resources Bhdimage, as they will benefit more from higher selling prices compared with peers with exposure to Indonesia.”

Kenanga Research meanwhile is staying neutral on the plantation sector, with an unchanged 2021 CPO price forecast of RM3,000 per tonne.

“The bearish Malaysian Palm Oil Board data and expectations of a further rise in inventory levels should weigh on CPO prices. We continue to believe that the peak has occurred, if not soon.

“That said, valuations of planters under our coverage and the KL Plantation Index seem to have somewhat priced in the negatives.”

Separately, PublicInvest Research said Malaysia recorded its biggest palm oil export growth last month since September 2018.

“After dropping for two consecutive months, palm oil exports surged 31.8% month-on-month to 1.4 million tonnes as buyers stocked up ahead of the Ramadan and Hari Raya holidays.

“The strong growth was mainly driven by the European Union (46.1%), India (42%) and Pakistan (158.6%), which were partly offset by China (-13.1%) and the United States (-49.8%).”

Moving forward, MIDF Research said it anticipates export demand to pick up, on the back of gradual recovery of economic activities in India and China.

“On top of that, we anticipate that the demand from China will increase in the coming months, as it recently approved the new standards for premium palm oil.

“We believe that this will impact positively on the sector and give more opportunity to our local plantation players to increase their export volume, ” it said.

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