RHB Research said that it needs to be a strong El Nino before CPO prices can move by over 20%, thus making a more significant difference to planters’ earnings.
PETALING JAYA: Despite a looming El Nino weather phenomenon, lessons learnt from history include the need for a strong El Nino to occur before the crude palm oil (CPO) prices can move significantly, says RHB Research.
The research house noted: “Even if we assume a 20% hike from here, 2023 average prices would still be in the RM3,800 to RM4,000 per tonne range, in line with current consensus projections.”
Although CPO prices generally benefit from an El Nino event, RHB Research reiterated that it needs to be a strong El Nino before CPO prices can move by over 20%, thus making a more significant difference to planters’ earnings.
Currently, most of the climate models are pointing to a moderate El Nino, as based on historical events over the last 40 years, there has never been an instance of two strong El Nino’s in a row.
“As the last strong El Nino we had was in 2015-2016, this next one, if confirmed, is likely to be moderate,” the research house said in its plantation report yesterday.
There is also not much upside to CPO prices, it said, adding that the third month CPO price has fallen to RM3,400 per tonne.
Assuming a moderate El Nino and prices rising 20% to RM4,100 per tonne, the research house noted 2023 average prices should be RM3,800 to RM4,000 a tonne, given year-to-date price of RM4,000 per tonne.
“As this is in line with consensus forecasts, upward earnings seem unlikely as prices need to hit closer to the RM5,000 mark for any significant revision to occur,” the research house explained.
It also said not all El Nino’s are positive for prices, as CPO is affected by many other demand and supply dynamics and issues such as economic environment and geopolitics.
“El Nino has a larger impact on CPO prices some 12 months later given the longer term impact that dryness has on productivity of palm oil trees,” it added.
Generally, El Nino’s impact on yields can be seen six months, 12 months and 24 months later.
“It also can be seen however, that even 12 months later, CPO price impact is not uniform – with June 1993, February 1996 and February 1999 – being anomalies, where CPO prices actually fell 12 months later,” said the research house.
Hence, RHB Research, which maintained a “neutral” call on the sector, expects CPO prices to range between RM3,500 to RM4,500 a tonne for the rest of 2023, averaging at RM3,900 a tonne. Its top picks include Kuala Lumpur Kepong Bhd
, IOI Corp Bhd and Wilmar International Ltd.
