DESPITE the recent sharp correction in crude palm oil (CPO) prices, it may still be too early to turn bearish on plantation sector as crop recovery remains uncertain at this juncture.
In this regard, Hong Leong Investment Bank (HLIB) Research pointed out two potential outcomes, namely (i) palm oil output recovery in Malaysia may disappoint; and (ii) that La Niña may return for a third year in a row by September/October 2022.
“This, if it happens, will likely affect palm oil production in Malaysia and Indonesia as well as upcoming soybean planting in South America (in particular, Brazil),” opined analyst Chye Wen Fei in a plantation sector update.
“Besides, CPO price discount to soybean oil has recently widened to US$400/metric tonne (MT) and this will likely spur buying interest.”
Against such backdrop, HLIB Research has reiterated its 2022-2024 CPO price assumptions of RM5,500/RM4,500/RM4,500 per MT and “overweight” stance on Malaysia’s plantation sector.
Despite having rebounded by 4.5% (to RM4,700/MT) yesterday, CPO futures (three months) still fell by 17.5% from last Friday’s (June 17) closing due to:
- Sharp correction in crude oil and other competing vegetable oils arising from concerns on global economy slowdown;
- Concerns over rising palm oil exports from Indonesia (following Jakarta’s move to flush out palm oil inventories accumulated since March); and
- Easing concerns on labour shortage in Malaysia (as the Human Resources Minister recently mentioned that issues surrounding the recruitment of foreign workers from Indonesia, Bangladesh and Cambodia will be resolved soon).
“At this juncture, it remains uncertain if foreign labour will arrive at Malaysian shore just in time for its seasonal peak production cycle,” noted HLIB Research.
“And even if they do, the numbers may not be sufficient while fertiliser shortfall and high fertiliser prices will likely result in under-application of fertiliser (particularly among smallholders which account for circa 40% of the planted area in Malaysia), hence leading to a disappointment in palm oil output recovery.”
As for La Niña, the research house expects the weather phenomenon to likely affect (i) palm oil production (as it coincides with seasonal pick-up in palm production cycle); and (ii) upcoming soybean planting in South America (in particular, Brazil which accounted for about 36% of the world’s total soybean output in 2021).
“Impact on production aside, we note that prices of CPO and soybean tends to strengthen as La Niña (as well as El Niño) sets in and weaken when the weather anomaly subsides,” suggested HLIB Research.
For stock market exposure, the research house prefers integrated players such as Kuala Lumpur Kepong Bhd (KLK) (“buy”, target price: RM32.43) and IOI Corp Bhd (“buy”; TP: RM5.07) over purer upstream players given the former tends to deliver more stable financial performance amid volatile palm product price trend. – June 24, 2022
