Low production season boost for CPO prices

Malaysian palm oil edged up on Friday evening for its first gain in four sessions on the back of falling production outlook, after earlier hitting its lowest level since August last year on rising global vegetable oil supplies and weak demand..

PETALING JAYA: Crude palm oil (CPO) prices are expected to stay above RM2,400 per tonne mark in the short-term as most estates nationwide enter low production season from January to February, say analysts.

Yesterday, the third-month benchmark CPO futures for April rebounded to close RM30 higher at RM2,475 per tonne from RM2,445 last Friday.

Analysts, however, are bearish on CPO prices going forward.

This is due to the bearish factors such as high stockpile, subdued exports, a possible import tax hike by top buyer India and concerns over the EU ban on palm biodiesel that could dragged prices lower for the rest of this year.

According to UOB Kay Hian, palm oil will likely see an oversupply situation by mid-2018.

There is ample supply of soybean in the market, which could pressure soybean prices, in turn capping palm oil prices, the research unit says in its latest report.

UOB Kay Hian is also “negative” on upstream plantation companies as “weak CPO prices could adversely affect the earnings and share price performance of plantation companies.”

It expects only plantation companies that are able to register higher fresh fruit bunches (FFB) production growth will be able to mitigate the negative impact from weakening CPO prices.

According to UOB Kay Hian, weak demand outlook could result in inventories building up or slow down its decline over the next three months. Thus, high inventory levels will keep a lid on CPO prices.

The research unit reckons that CPO prices could trend lower between RM2,400 and RM2,700 per tonne from January to April due to weak demand and multiple negative news flows in the sector.

From May 18 onwards, UOB Kay Hian is maintaining its view that CPO prices could trend lower to RM2,200-RM2,400 per tonne on a significant increase in production.

Potential catalyst to CPO price is the wet weather La Nina event that would affect soybean production badly and draw down inventories.

This could lead to a soybean price increase, and in turn positive to CPO prices.

Another catalyst will be the proposed extended subsidies to non-Public Service Obligation segment by Indonesia.

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