WHILE the high crude palm oil (CPO) prices may stay for now, investors must pay heed to volatility that arises from the high prices.
For now, however, UOB Kay Hian Research expects current CPO prices as being supported by (i) exceptionally low palm oil stock to be carried over to 2021 will lead to a tighter supply in 1H 2021; (ii) equally low soybean inventory; and (iii) concerns over La Nina (which brings high rainfall to Southeast Asia but dryness to North and South America).
However, the research house cautioned the following potential drawbacks:
- Demand rationing as purchasing power in developing countries may not return to pre-COVID-19 levels and this would limit consumption at current high prices;
- Higher output in 2H 2021 with negative price correlation ahead of the potential inventory build-up (likely to happen in 4Q 2021); and
- Demand from biodiesel may cool off as supply of used cooking oil is set to increase with the re-opening of the HoReCa (hotel, restaurant and catering) sectors.
Against such backdrop, UOB Kay Hian Research raised its CPO price assumptions for 2020-2021 to RM2,650 and RM2,600 from RM2,400 and RM2,350 respectively to reflect the recent strong recovery in CPO prices which are likely to sustain into 1Q 2021 due to tight global vegoil supply.
Nevertheless it maintained a “market weight” stance on the plantation sector over concern of potential demand rationing as prices surge as well as production recovery in 2H 2021.
“Purchasing power, especially in developing countries, may not return to pre-COVID-19 levels and this would limit consumption at current high prices,” noted analysts Leow Huey Chuen and Jacquelyn Yow in a plantation sector update.
“Further, the narrowing discount of CPO prices to soybean oil prices may see demand move to soybean, while it may also not be able to recapture the market share that was lost to sunflower oil in early-2020.”
The current high soybean prices could lead to larger soybean planting acreage in the US planting season starting 3Q 2021. – Nov 19, 2020
