Lack of catalysts to lift CPO price
Lim Cian Yai 
Analysts and planters expect the current price level of CPO to stay at least for the near term

After enjoying a bullish run from the second half of 2016 to the first quarter of this year, crude palm oil (CPO) seems to have lost its momentum. A lack of catalysts suggests there will be little to boost the price of the commodity next year.

From July last year to February this year, the price surged to above RM3,300 per metric tonne (MT) from a low of RM2,200. It has since entered into consolidation mode hitting a one-year low of RM2,335 on Dec 13.

With the 45% price rally having fizzled out, analysts and planters expect the current level to stay at least for the near term.

Public Investment Bank Bhd plantation analyst Chong Hoe Leong has a neutral call on the sector in 2018, despite his favourable view this year. He expects CPO price to hover between RM2,600 and RM2,700 per MT till the first half of next year.

This is in line with Sime Darby Plantations Bhd executive deputy chairman and managing director Tan Sri Mohd Bakke Salleh’s projection of RM2,500-2,600 per MT in the near term.


Limited upside

Chong’s view stems from expected stronger production of fresh fruit bunches (FFB) in the coming months. Latest statistics released by the Malaysian Palm Oil Board (MPOB) showed palm oil inventories in November rose 15.9% to 2.55 million MT, from 2.2 million MT the month before. It was the highest stockpile level since January last year.

Yield contracted 3% month-on-month to 2.01 million MT.

“The recent heavy rainfalls are likely to lead to stronger FFB yield in the upcoming months. Although flooding could be disruptive to harvesting and transportation of palm oil, there was no flooding reported in major producing areas thus far,” he tells FocusM.

He believes inventories will continue to creep up in the coming months due to the stronger CPO production. This, coupled with the weakening of the US dollar index, will likely exert downward pressure on the commodity price.

“Thus we maintain a negative outlook on CPO price in the near-term and expect it to correct over the next couple of months,” he says.

Production of fresh fruit bunches is expected to pick up next year

Widening ban

Chong is concerned over the widening ban on palm oil consumption, particularly from the European Union (EU).

The latest blow was the endorsement by EU Parliament’s Industry, Research & Energy Committee (ITRE) on the ban on palm oil biofuels last month. In April, the European parliament had voted to phase out unsustainable palm oil by 2020.

The EU is the second-largest palm oil export destination after India for both Malaysia and Indonesia, the two largest palm oil producing nations in the world.

On the other hand, the US Environmental Protection Agency (EPA) is considering lowering the biodiesel blending requirement by 15% for 2018 and 2019 under the Renewable Fuel Standard (RFS). If this materialises, it is expected to push down soybean and CPO prices, as appetite for both commodities wanes.

Apart from the high inventory level, the seasonal decline in consumption will not bode well for CPO price in the near term. Demand from India and China may also taper off in the coming months as palm oil tends to solidify during the winter season.


Recovery in FFB yield

JF Apex Research’s analyst Low Zy Jing anticipates a slight growth as FFB production picks up next year. He notes performance of the sector has been “insipid” for the past 11 months.

Despite a 4.35% gain in the benchmark FTSE Bursa Malaysia KLCI Index (FBMKLCI) year to date, the Bursa Malaysia Plantation Index (KLPLN) has been a laggard, inching up by only 1.48% during the corresponding period, to 7863.77 points on Dec 4.

Low sees the quantum of increase in KLPLN as a mismatch with the 13.2% growth in FFB production for the first 10 months this year, as well as higher-than-expected CPO price during the period.

As the average selling price (ASP) of CPO has fared better than expected during the year, Low has revised the targeted ASP from RM2,683 to RM2,800 per MT.

He also has a neutral stance on the sector. While FFB production has recovered, the effect is neutralised by the softer CPO price and higher inventory.

Meanwhile, labour shortage in the plantation industry is expected to continue bogging down the sector’s performance and putting pressure on planters’ operating costs.

Industry veteran MR Chandran said recently in an annual plantation conference that the industry is facing challenges in reducing labour intensity and improving labour productivity as a result of difficulty in mechanising harvesting operations.

He stressed there is a need for Malaysia to have a long-term policy on foreign labour since they represent about 82% of the 600,000 workers in the plantation sector.

To ensure sustainable development of the industry, land-to-labour ratio will have to increase to 15:1 by 2025, from 9.5ha to one worker currently, he adds.

JF Apex Research’s Low continues to favour Kim Loong Resources Bhd due primarily to its prudent management and consistent performance posted by planters for the past few years. He has a target price of RM4.59 and a hold rating on the stock.



Nevertheless, the outlook for CPO is not totally gloomy. Low thinks should the La Nina phenomenon exacerbate, it may temporarily disrupt production of some estates and have a positive effect on CPO price. “However judging from current inventory level, we think the effect will be minimal,” he says.

Public Investment Bank’s Chong says rising crude oil prices will be the only wild card that could provide support to CPO price.

Brent crude oil price has shown a strong recovery recently gaining 15% year to date. The rally was driven by the Organization of the Petroleum Exporting Countries’ (OPEC) commitment to extend production cuts until the end of 2018, from early 2018 initially.

This has been perceived as a Saudi Arabia-led effort to limit supplies ahead of the world’s largest listing – Saudi Aramco next year. Saudi Arabia is the world’s largest exporter of oil and OPEC’s de facto leader.

“The strong crude oil prices would provide support to CPO price as biodiesel play will be making a comeback. Should Brent crude oil stay above US$60 per barrel and ringgit remain at current level of RM4.20, we believe CPO price would be supported at RM2,650 per MT,” adds Chong.

His top picks are Sime Darby Plantation Bhd, Ta Ann Holdings Bhd and Genting Plantations Bhd.

This article first appeared in Focus Malaysia Issue 263.