Signs of recovery seen for CPO

At Monday's close, the benchmark palm oil contract for February delivery on the Bursa Malaysia Derivatives Exchange was down 3.9 percent at 1,965 ringgit ($469.42) a tonne. That was its biggest one-day dip since Feb. 16 last year. Traded volumes stood at 53,531 lots of 25 tonnes each.

PETALING JAYA: The plantation sector looks to be more positive in the first quarter of 2019 (Q1’19), with signs of a sharp recovery in crude palm oil (CPO) prices, said Kenanga Research.

The three key positive factors to be monitored closely are easing trade tensions between the US and China, higher exports of Indonesian CPO to the European Union (EU), as well as falling stockpiles in both Malaysia and Indonesia.

The research house believes that there will be a notable pick-up in the first quarter, stemming from China due to higher festive consumption during Chinese New Year, as well as India, which will see a downward revision in import duty from 44% to 40%, effective Jan 1 2019, as per the Malaysia-India Comprehensive Economic Cooperation Agreement. The local production of fresh fruit bunches (FFB) has likely reached its peak in October and started slowing down in November.

“This trend is likely to continue for the month of December as we enter the height of the monsoon season in the East Coast and Sarawak, followed by a sharp seasonal production drop in January. Consequently, we believe stockpiles will edge down from the current three million tonnes to an estimated 2.6 million tonnes by the end of Q1’19, which is a fairly comfortable level in our opinion,” said Kenanga Research.

Over in Indonesia, consensus expectation from Bloomberg suggests that stockpiles likely declined an estimated 10% to 3.9 million tonnes in November from 4.3 million tonnes a month ago. The research house expects CPO prices to improve to between RM2,300 and RM2,400 per tonne by the end of the first quarter of 2019, edging up further to RM2,500 to RM2,600 per tonne in the second quarter, as stockpiles continue diminishing amid low production season.

Prices would retrace to RM2,200 to RM2,300 per tonne in the second half of 2019, when output picks up again.

Overall, the 2019 CPO price is forecasted at an average of RM2,400 per tonne, representing a year-on-year increase of 7%. This is premised on a recovery of US soybean oil from US$0.30 per pound to US$0.33 per pound as China resumes purchases of US soybeans, and a higher ringgit to US dollar of 4.15 versus 4.03 in 2018.

Despite the prospective catalysts, Kenanga Research is mindful of a potentially frail results season in February 2019.

This is because the adverse impact of lower CPO prices in Q4’18 could likely overshadow the positive effect of production pick-ups.

“We believe a strategic time to accumulate planters is early March, with the focus on bashed-down upstream players like Hap Seng Plantations Holdings Bhd as well as planters with excellent execution capabilities and robust production outlook like Genting Plantations Bhd. Overall, we believe planters are seeing the light at the end of the tunnel after going through a rough ride in the fourth quarter of 2018,” said Kenanga Research.

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