CPO prices to rebound in 4Q due to La Nina, says Kenanga Research

Malaysian palm oil futures rose for a second session in four on Friday as better performing rival soy oil gave the market a late boost even though a stronger ringgit MYR= weighed on prices earlier in the day.

KUALA LUMPUR :Kenanga Research has maintained its forecasted crude palm oil (CPO) average price of RM2,400 per metric tonnes (mt) with a rebound in prices expected later this year due to the La Nina phenomenon.

 

In a note today, the research house said it expects prices to decline further in the near term to RM2,250/mt on the back of higher supply and subdued market demand.

 

“Meanwhile, biodiesel mandates will continue to support prices but are unlikely to catalyse the market given slow uptakes. Instead, La Nina could boost CPO prices in the fourth quarter (4Q) with an appreciation potential of at least RM120/mt,” it said.

 

According to Kenanga, current production numbers are closely tracking the five-year historical monthly lows, suggesting further downside ahead.

 

It forecast that total 2016 production could come in as low as 17.65 million tonnes, or 12% below last year's total of 19.96 million tonnes.

 

“We think the impact of the drought and slow recovery is likely to push peak production into the September and October periods, which is later than the previous two years' peak production month of August. On the other hand, overall demand for CPO in June came in weaker than last year with significant drops in key markets such as China,” it explained.

 

In view of the CPO price outlook, Kenanga recommends investors to trim down positions in plantations companies presently with a view of accumulating prior to the anticipated rebound in 4Q.

 

Among its top picks in the sector are KL Kepong Bhd, TSH Resources Bhd and Ta Ann Holdings Bhd.