Extremely high CPO price will result in demand pullback

ALTHOUGH crude palm oil (CPO) prices will gradually ease from 2Q 2021 on the back of an absence of weather disruption and improving supply prospects of soybean, the price of the golden crop will likely remain elevated at above RM3,500/metric tonne (mt).

Hong Leong Investment Bank (HLIB) Research expects the CPO price to be supported by (i) supply tightness in major edible oils; (ii) still-tight edible oil inventory levels for major consuming countries which will sustain near term inventory replenishing activities; (iii) competitive CPO price relative to other edible oils; and (iv) biodiesel mandate in Indonesia which curbs supply of palm oil.

In 1Q 2021, CPO price averaged at RM3,919/mt (which is 49% higher than RM2,629/mt during the same period last year and 42% higher than RM2,760/mt in 2020).

This was mainly due to supply disruption of edible oil arising from (i) unfavourable weather condition which disrupted output for major edible oils including soybean and palm oil; and (ii) labour issue and lower fertiliser application which affected palm oil output).

Beyond 1H 2021, HLIB Research expects CPO price to likely trend down more drastically on the back of (i) better supply outlook for soybean output (particularly in the US and Brazil which collectively account for circa 65% of the world’s total soybean output); (ii) seasonally higher palm oil output in the second half of the year, and (iii) demand pullback when a recovery in supply of major edible oils is in sight amid the absence of fresh demand catalyst.

“The surge in CPO price has yet to result in palm demand pullback so far as (i) current high edible oil prices are driven mainly by supply shortage of major edible oils (including soybean and palm oil) and low inventory levels among major edible oil countries; and (ii) palm oil’s price competitiveness over other competing oils,” opined analyst Chye Wen Fei in a plantation sector update.

“However, we believe a pullback in palm demand will kick in when a recovery in supply of major edible oils is in sight amidst the absence of fresh demand catalyst, hence resulting in weaker CPO price.”

All-in, HLIB Research raised its CPO price assumption to RM3,200/mt in 2021 mainly to reflect (i) strong average CPO price registered in 1Q 2021 (RM3,919/mt), and (ii) supply tightness in vegetable oils which will likely persist into end 2Q 2021.

Elsewhere, the research house also raised its CPO price assumption by RM100/mt to RM2,800/mt in 2022-2023 in anticipation that supply of vegetable oil (particularly soybean and palm oil) would have returned to normalcy by then.

Following the upward revision to its CPO price assumption in 2021-2023, HLIB Research also raised its earnings forecasts for plantation companies under its radar.

“Post revisions in target prices, we upgrade our rating on IOI Corp Bhd (from “hold” to “buy”) and downgrade our rating on Hap Seng Plantations Holdings Bhd (from “buy” to “hold”),” added the research house.

Ratings for its other plantation stocks, on the other hand, remain unchanged. – April 12, 2021

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