Crude palm oil prices likely to have hit rock bottom

Re-rating catalyst: The correction over the last one year could have factored in the lacklustre CPO price outlook, given the increase in FFB production this year. — Reuters

PETALING JAYA: Crude palm oil (CPO) prices may have hit the bottom, as the commodity has been trending between the RM2,350 and RM2,550 per tonne range in the past six months, say analysts.

According to UOB Kay Hian Securities, the correction over the last one year could have factored in the lacklustre CPO price outlook, given the increase in fresh fruit bunch (FFB) production this year.

“As we are not expecting further weakness in CPO prices, we reckon the plantation sector is now trading at its near-term fair value.

“CPO prices are likely to trade sideways, and we are awaiting stronger re-rating catalysts such as a much stronger biodiesel demand or disappointing production,” the research unit said in its latest report.

To date, the CPO average selling price forecast is RM2,437 per tonne, down 18.3% year-on-year.

For 2018, UOB Kay Hian is maintaining its forecast of RM2,400 per tonne as “CPO prices could trend as low as RM2,250 per tonne once production picks up in the second half of 2018.”

It is also maintaining its 2019 CPO price assumption at RM2,500 per tonne.

Hence, the research unit said CPO prices could trend sideways in the near term.

“CPO prices are negatively correlated with palm oil inventory levels.

“As inventory is expected to increase in the second half of 2018, CPO prices are expected to trend in the range of RM2,350-RM2,500 per tonne in the second quarter of 2018.

“However, CPO prices could trend even higher at the end of fourth-quarter 2018 due to the low production season,” it added.

In addition, biodiesel could buffer the downside risk on CPO.

UOB Kay Hian said that biodiesel demand could be higher than expected in the second half of this year on the back of the current higher crude oil price.

The potential extra demand is set to come from non-mandated biodiesel blending.

As at 5pm yesterday, the third-month benchmark CPO futures contract for August on Bursa Derivatives Exchange settled RM10 lower at RM2,356 per tonne.

Meanwhile, the Malaysian Palm Oil Board (MPOB) reported yesterday that palm oil stock for May had eased slightly by 0.51% to 2.17 million tonnes from a month earlier.

This fell short of most analysts’ much lower projection of between 2.07 million and 2.09 million tonnes for end-May palm oil stocks.

For the period under review, MPOB said CPO production also fell 2.11% to 1.53 million tonnes, while exports contracted 15.7% to 1.29 million tonnes.

On the risk factor in the plantation sector, UOB Kay Hian noted that labour was the main challenge facing the sector.

“Oil palm cultivation is labour-intensive and mechanisation has its limits.”

The research unit added that the sector was facing two major issues with regard to labour; an acute labour shortage and the cost pressure from the rising minimum wage.

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