CPO prices expected to be lower in 2022, say market analysts

Surge in prices: A farmer sprinkles chemical fertiliser on a crop of finger millet on the outskirts of Bangalore in India. Rising fertiliser costs due to supply constraints will impact CPO prices. — AFP

WHILE crude palm oil (CPO) prices hit a record high on Wednesday, with three-month futures prices closing at RM5,015 per tonne, market analysts still expect CPO prices and plantation earnings to decline in 2022.

UOB Kay Hian Research maintains its “underweight” rating on the plantation sector, and expressed its concern over the sustainability of the current demand as the inventory in India and China has been replenished. The research unit is keeping its CPO price forecast for 2021 and 2022 at RM3,300 and RM2,800 per tonne respectively, but sees upside potential due to tight global edible oil supplies while demand is still relatively stable despite high prices.

UOB Kay Hian Research notes that for January to September 2021, the average price reported by Malaysian Palm Oil Board (MPOB) was at RM4,207 per tonne and the average for 2021 could come higher given CPO prices were traded between RM4,747 to 5,072 per tonne for Oct 1 to Oct 12.

However, the net price that will be reported by most of the plantation companies will still be lower than RM4,000 per tonne due to the forward sales contracts and the impact from the exports levy and duty in Indonesia.

For companies under UOB Kay Hian Research’s coverage, only Hap Seng Plantations Holdings Bhd managed to report average selling prices (ASPs) closer to the CPO price reported by MPOB.

The research unit also points out that the surprise import duty cut by India on vegetable oils on Wednesday would be supportive to the palm oil market, as the country is the largest export market for palm oil.

“This is the fifth change to Indian vegetable oils’ import duty in 2021 with the new duties on CPO, refined palm oil, soybean oil and sunflower oil reduced to the lowest level since 2015.

High inflation as a result of high food prices and weaker-than expected local oilseeds supplies could have triggered this change,” says UOB Kay Hian Research.

Indian edible oil import for September 2021 was a record-high at 1.7 million tonnes (66% higher year-on-year) and this also led to a record high stock position of about two million tonnes at ports and pipelines.

For now, UOB Kay Hian Research believes CPO prices may sustain at the current levels due to the continued disappointing palm oil production as yield recovery from the previous drought is taking longer than expected and there is a lack of workers in Malaysia.

Other edible oil supplies remain tight as well and the upcoming La Nina posts another risk to the next planting season in South America.

Should the high prices remain for longer periods, companies such as Kim Long Resources Bhd, Sarawak Oil Palms Bhd, Hap Seng Plantations, and Indonesia-listed Tunas Baru Lampung and Astra Agro Lestari are those with high beta to CPO prices.

UOB Kay Hian Research opines that companies with high dividend yield are Kim Loong Resources, Hap Seng Plantations, Sarawak Oil Palms, Kuala Lumpur Kepong Bhd, and Singapore-listed First Resources.

It also notes that risks include rising fertiliser costs due to supply constraints, better demand as agri-commodity prices improve, and logistic bottlenecks.

“As fertiliser cost (30% of ex-mill cost) is one of the biggest components besides labour cost, the surge in fertiliser prices could lead to a cost increase of at least 15% to 20% if production fails to catch up again,” says the research unit.

There would also be crop losses due to worker shortage, especially for Malaysian-based companies.

“Approval has been granted to bring in 32,000 foreign workers as early as end-October 2021, but this will not be able to solve the crop losses problem in the immediate term. Companies may continue to suffer from crop losses and loss of potential revenue,” says the research unit.

Meanwhile, RHB Research also maintains its “underweight” rating on the plantation sector, and notes that Malaysia’s CPO output was flattish in September, while stocks fell 7% to 1.75 million tonnes.

It advises investors to ride the wave and look for opportunities to sell into strength, with CPO prices currently at a peak, and some strength being seen in share prices.

“We believe this jump (CPO prices’ spike) may be short-lived, as we continue to expect next year’s fundamentals of supply to improve, with a moderation of CPO prices in 2022. The main risk to this thesis is weather abnormalities. However, share prices have, for the first time this year, started moving in tandem with CPO prices. We believe now is the time to ride the wave, and wait for a good opportunity to lock in some profits,” says RHB Research, adding that environmental, social, and governance (ESG) concerns will still impact sector valuations.

The research unit says it likes Sarawak Oil Palms and Ta Ann Holdings Bhd, Singapore-listed Wilmar International, and Indonesia-listed London Sumatra.

While India’s reduction of import duties and agricultural cess is positive for all vegetable oil exporters, RHB Research notes that the duty on CPO is now higher than that of soybean oil, from equal previously).

“This, taken in together with the normalised palm oil stock levels in India and the advent of the post-Deepavali season dip, could result in some switching to soybean oil in the near future,” says the research unit.

RHB Research points out that India’s palm oil stock levels have normalised, after jumping 88% month-on-month and 79% year-on-year in September.

Meanwhile, China’s palm oil stock levels fell in September (11% lower month-on-month, 3% lower year-on-year), despite the higher imports from Malaysia.

“As stock levels remain low, we could see China’s palm oil imports staying stable in the next few months, although there could be some moderation once United States soy harvests come out in October to November. China’s palm oil imports were up 8% year-on-year in August year-to-date,” says RHB Research. Meanwhile, MIDF Research maintains its “positive” rating on the plantation sector with a 2021 CPO target price of RM3,600 per metric tonne. MIDF Research believes the palm oil supply tightness situation will likely remain at least until end-2021, given limited recovery of yield due to shortages of skilled harvesters, better demand outlook on the back of more economic activities locally and globally and upcoming La Nina weather phenomenon.

“On the demand front, we believe replenishment activities to import more palm oil will continue to be healthy bolstered by upbeat activities in the hotel, restaurant, catering (Horeca) segment in China and India.

“We anticipate that the CPO price will remain favourable in the fourth quarter, supported by tight inventory supply in our local plantation industry,” says the research unit.

However, MIDF Research points out that the Malaysian plantation sector still has to deal with heavy criticism and misconceptions with regards to the effect of its production on ESG related issues.

“If we look at the KL Plantation Index, we can see that there has been a disparity between CPO prices and local plantation counters, which is possibly affected by negative ESG sentiment resulting in lower interest for the plantation sectors,” the research unit points out.

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