PETALING JAYA: Crude palm oil (CPO) price discount to its main competitor, soybean oil, is expected to widen by about US$70 to US$100 per tonne after trading at almost zero discount in February, say analysts.
Should the price discount gap gets bigger, analysts project that demand for CPO could increase in the coming months.
Analysts said price-sensitive major markets such as China and India were keen to take up palm oil as a cheaper alternative to soybean oil.
To date, the CPO price discount to soybean has gradually widened to about US$75 to US$80 per tonne.
According to Kenanga Research, the current modestly higher CPO price discount to soybean oil should benefit demand for palm oil, as well as support CPO prices.
“Although the gap is lower than the long-term historical average discount of about US$140 per tonne, the wider discount could prove attractive to price-sensitive buyers,” said the research unit in a report.
Looking ahead, the CPO-soybean discount may either maintain or widen as production kicks in over the second half of 2017.
It also envisaged the higher discount, coupled with better CPO availability, having a positive demand impact going into the second half.
Kenanga, which has a “neutral” outlook on the plantation sector for the third quarter of 2017, said the prospect of weaker prices could be offset by better earnings from planters on the back of strong production and decent demand outlook.
“Our financial year 2017 CPO price estimate is unchanged at RM2,550 per tonne, although the second-half 2017 prices are likely to average below this figure, given the strong first-half 2017 performance.
“Recent price declines are in line with our bearish projections for stock improvements while production appears on track to meet 19.95 million tonnes, matching 2015’s all-time high of 19.96 million tonnes.”
Kenanga pointed out that those looking to biodiesel and weather to prop CPO prices may be disappointed.
Other risks include the United States and European Union biodiesel investigations, which may hurt CPO export demand in the long term.
“Our CPO price-based price-earnings ratio estimates indicate a planters’ share price downside of about 7% at CPO prices of RM2,200 per tonne and about 13% should CPO prices tack down to RM1,800 per tonne.”
Nevertheless, the research unit still expects an earnings improvement in the second half of 2017, thanks to higher CPO prices and local CPO production recovery.
In a declining price environment, Kenanga expects big-caps with downstream facilities such as IOI Corp Bhd , Kuala Lumpur Kepong Bhd and PPB Group Bhd through associate Wilmar International Ltd to benefit from lower input costs.
It also likes efficient planters with an above-average production outlook such as IJM Plantations Bhd , TSH Resources Bhd and United Malacca Bhd to offset a weaker price environment.