Tight supply of palm oil seen to keep CPO prices up

Peaking: An oil palm plantation worker in action. With the low inventory level of palm oil and global edible oil supplies, the average CPO price recorded a new monthly high in March.

PETALING JAYA: Despite some anticipating a crude palm oil (CPO) price correction after recording a new monthly high last month, the tight supply of palm oil is likely to keep the commodity price elevated.

With the low inventory level of palm oil and global edible oil supplies, the average CPO price recorded a new monthly high in March, where prices rose 4% month-on-month (m-o-m) and 70% year-on-year (y-o-y) to RM4,042 per tonne.

CGS-CIMB Research evaluates that Malaysia’s palm oil inventory, which was up 0.9% m-o-m, declined by 24% y-o-y to 1.31million tonnes at end-March 2021.

The research house said that the inventory level figures were consistent with the historical trend showing that palm oil stocks have been declining at an average 1% m-o-m over the last ten years.

“This suggests a very tight palm oil stock level as Malaysia’s March palm oil stock level has averaged 1.97 million tonnes over the past 10 years.

“Official figures will be released on April 12, ” the research house said in a note yesterday.

Going by this, CGS-CIMB foresees CPO prices hovering between RM3,500 and RM4,000 per tonne this month amid the low inventory of palm oil in the country.

However, the research house expects the palm oil supply to recover in the second quarter of this year (Q2) as weather conditions normalise.

“We maintain our average CPO price forecast of RM2,900 and RM2,700 per tonne for 2021 and 2022 respectively and reiterate our ‘neutral call’ on the sector, ” it added.

Kenanga Research, which also has a “neutral” call on the sector, said while it believes the trajectory for the CPO price is heading downwards, it is turning less bearish.

It pointed out that post the expected decline, prices would still be higher than the calendar year 2020 level.

Its 2021 estimated CPO price stands at RM3,000 per tonne.

Another justification for its neutral call is that valuations of planters under its coverage and the KL Plantation Index seemed to have priced in the negatives.

“We do not expect the KL Plantation Index to come under severe pressure when CPO prices correct, as it has not tracked the gains in CPO prices since the commodity exceeded RM3,500 per tonne.

“We continue to believe in our case of CPO prices peaking in the Q1, ” Kenanga Research said in its report.

It added that after a good Q4 of 2020 results season, improvement in CPO prices will likely be muted by the seasonal decline in output

“Based on the Malaysian Palm Oil Board’s data, the Q1 average CPO price rose 16% quarter-on-quarter to RM3,919 per tonne compared to RM3,366 per tonne in Q4 of 2020, while we expect around a 25% decline for Malaysia’s Q1 production, ” it said.

It said Indonesia’s biodiesel policies are to be watched closely.

Any changes that will increase the levy to fund the B40 will be bullish for CPO prices but the impact on planters will favour Malaysia upstream planters and Indonesian refiners, it added.

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