Cheaper CPO on the way


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PETALING JAYA: Crude palm oil (CPO) prices are expected to come under more pressure, as Malaysia’s palm oil stockpile is likely to increase further in the coming months.

After hitting a seven-month high in June, analysts believe the palm oil stockpile may increase on the back of a seasonally higher output trend and increasing competition from Indonesian exports.

CGS-CIMB Research said that Malaysian palm oil stocks are likely to be at the beginning of an upcycle.

“We project palm oil stocks to rise 21.4% month-on-month (m-o-m) to two million tonnes by end-July 2022, on higher output and lower exports,” it said in a note yesterday.

In June 2022, Malaysia’s CPO production rose by 6% m-o-m on higher harvesting days, while exports fell 12% m-o-m.

Amid the higher supply in the market, analysts are projecting lower CPO prices in the July-to-December 2022 period, following the higher-than-expected CPO prices in the first half of 2022 (1H22).

UOB Kay Hian Malaysia Research said CPO prices could remain weak in the near term, with the Indonesian government starting to allow more exports by increasing the domestic market obligation ratio and logistics congestion in Indonesia easing towards end-July.

UOB Kay Hian Malaysia Research said: “The Malaysian Palm Oil Board’s (MPOB) average CPO price for the first six months of 2022 was at RM6,301.50 per tonne, up 55.5% year-on-year, with the second quarter of 2022 (2Q22) likely to be the peak for this cycle. The average local CPO price as reported by the MPOB for July 1 to 9 is now RM4,243 per tonne.”UOB Kay Hian Malaysia Research said: “The Malaysian Palm Oil Board’s (MPOB) average CPO price for the first six months of 2022 was at RM6,301.50 per tonne, up 55.5% year-on-year, with the second quarter of 2022 (2Q22) likely to be the peak for this cycle. The average local CPO price as reported by the MPOB for July 1 to 9 is now RM4,243 per tonne.”

“We believe the news flow would send a negative signal to the market with an impression of high inventory levels in Indonesia and cause buyers to wait for a lower purchase price,” it said.

The research house also pointed out that CPO prices have already peaked.

“The Malaysian Palm Oil Board’s (MPOB) average CPO price for the first six months of 2022 was at RM6,301.50 per tonne, up 55.5% year-on-year, with the second quarter of 2022 (2Q22) likely to be the peak for this cycle.

“The average local CPO price as reported by the MPOB for July 1 to 9 is now RM4,243 per tonne,” it added.

It is noteworthy that CPO prices have fallen by over 45% from their peak of RM8,074 per tonne in early March, averaging at RM6,209 per tonne year-to-date.

Particularly in June, average CPO prices eased 11% m-o-m to RM6,106 per tonne, following a sharp correction in prices from around mid-June.

Nevertheless, the average price in June was still 59% higher than a year ago.

Hong Leong Investment Bank (HLIB) Research opined that the recent severe CPO price decline is overdone.

This is because the supply prospects of major vegetable oils remained uncertain.

In June 2022, Malaysia’s CPO production rose by 6% m-o-m on higher harvesting days, while exports fell 12% m-o-m. Amid the higher supply in the market, analysts are projecting lower CPO prices in the July-to-December 2022 period, following the higher-than-expected CPO prices in the first half of 2022 (1H22).In June 2022, Malaysia’s CPO production rose by 6% m-o-m on higher harvesting days, while exports fell 12% m-o-m. Amid the higher supply in the market, analysts are projecting lower CPO prices in the July-to-December 2022 period, following the higher-than-expected CPO prices in the first half of 2022 (1H22).

HLIB Research also noted that demand prospects had turned more favourable, on the back of palm oil’s improved price competitiveness, low inventory levels among major importing countries and more favourable Pogo spread. Pogo is the price spread between palm oil and gas oil.

“Hence, we maintain our 2022 to 2024 CPO price assumptions of RM5,500, RM4,500 and RM3,800 per tonne,” it said.

HLIB Research continues to be “overweight” on the plantation sector, supported by an anticipated recovery in the CPO price and the commendable valuations of plantation stocks on Bursa Malaysia.

CGS-CIMB Research, however, is “neutral” on the sector outlook.

“We believe weaker 2H22 CPO prices, coupled with higher operating costs due to the hike in the minimum wage in Malaysia to RM1,500 per month effective May 1, higher fertiliser costs, as well as the windfall or Cukai Makmur tax, will lead to lower profit margins in 2H22 unless productivity improves,” it said.

On the contrary, Kenanga Research opined that the plantation sector would continue to see robust margins, in spite of rising costs.

Despite the recent price correction, Kenanga Research said CPO prices are likely to stay firm in 2H22 and 2023.

“Looking ahead, another good set of plantation earnings can be expected for the coming April to June or 2Q22 results seasons.

“Thereafter, easier earnings are likely but still remain robust on the expected CPO price of RM4,500 per tonne for 2022 and RM4,000 per tonne for 2023.

“With a production cost of between RM2,000 and 2,500 per tonne, margins for the sector are still attractive,” it said in a note.

Moving forward, the research house said the appeal of the plantation sector was no longer about earnings recovery, but increasingly about earnings resilience, especially when inflationary and weakening economic concerns were clouding the market

“Firstly, plantation earnings look set to stay healthy on resilient demand for palm oil.

“The sector’s defensive asset-rich net tangible asset is another attraction and valuations are not excessive either, especially after the recent market sell-down,” according to Kenanga Research.

The research house upgraded its view on the plantation sector from “neutral” to “outperform” a month ago.

MIDF Research, which is also positive on the plantation sector, said that CPO prices would remain elevated in the second-half even as the vegetable oil’s price could ease in the coming months.

“We maintain our 2022 CPO price forecast of RM5,500 per tonne at this juncture,” it said.

MIDF Research expects CPO prices to be supported by edible oil supply concerns amid the Russia-Ukraine war, subdued production outlook for soybean in 2022 to 2023 and an improved demand outlook on improved economic activities.

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