CPO prices to see mid-to-long-term weakness

Malaysian palm oil futures rose 2 percent on Tuesday, a second consecutive session of gains on stronger export demand and expectations of weaker production.

KUALA LUMPUR: Kenanga Research has maintained its Neutral outlook on the plantations sector as downside on higher production is partly offset by crude oil price appreciation raising the price floor.

The research firm said the Malaysian Palm Oil Board (MPOB) announced the average CPO price for 2017 of RM2,783 per metric tonne,l which is 3% and 4% above Kenanga's and consensus forecasts.

It added that MPOB expets palm oil production recovery in 2018 at 3% ro 20.5 million metric tonnes with largely favourable weather seen in 2017.

"Our own projections are similar, at a range of 20.0 to 21.1m MT (implying growth of 0-6%), which is premised on record year production (seen in 2015) and the highest monthly production
levels over the last five years. 

"We think this is fair considering the sharp production setbacks seen in 2016-2017 disrupting the otherwise positive long-term production trend," said Kenanga Research.

It said one takeaway from MPOB's Palm Oil Review & Outlook seminar was the resurgence of discretionary palm biodiesel blending to support CPO prices, but the research firm expects gasoil prices to continue to act a a floor to prevent significant price drops. 

Kenanga Research also believes that the strongly negative perception of palm oil in Europe will result in the ban of palm biodiesel, which could affect demand given the high proportion of aplm oil exports to the EU used for biofuel.

"Upon enactment of the law, we would expect softer near-term demand from the EU but we think that with the EU’s local rapeseed oil likely to replace palm biodiesel as the main feedstock,
this would create a supply gap in edible oils for food consumption. 

"This could be a potential market for palm oil, depending on the degree of consumer sentiment, and overall result in a shift in EU demand from biodiesel into food usage over the longer run."

Kenanga Research expects CPO prices to trade sideways with a 1Q18 CPO price range of RM2,370-2,575 per metric tonne. 

It noted that a weaker USD/MYR could pose a risk to RM-based CPO prices. 

Kenanga Research maintained its expectation of mid-to-long-term price weakness and favours integrated plantation picks such as PPB and IOI Corp.