HLIB Research maintained its average CPO price assumption for this year of RM4,200 per tonne.
PETALING JAYA: Malaysia’s plantation sector is expected to see firmer earnings momentum as supply-side constraints and policy catalysts set the stage for a recovery in crude palm oil (CPO) prices in the months ahead, analysts say.
Market volatility seen over the past year is expected to give way to a more constructive environment, underpinned by weather developments, biofuel policies and tightening output growth.
According to Hong Leong Investment Bank Research (HLIB Research), CPO price recovery could take place after next month, supported by seasonally lower cropping patterns, which started kicking in since last November; the onset of La Nina conditions, which will likely affect palm oil’s near term harvesting and soybean planting progress in Brazil; and resurfacing concerns on palm oil output growth, particularly in Malaysia and Indonesia, which collectively account for more than 85% of the world’s palm oil output.
Other favourable factors include the implementation of higher biodiesel mandate in Indonesia, and the finalisation of US biofuel mandate for this year and next.
The research house maintained its average CPO price assumption for this year of RM4,200 per tonne.
It also reiterated its “overweight” stance on the sector, supported by a positive outlook for CPO prices over the near to medium term.
In terms of stock picks, HLIB Research said it prefers planters with stronger Malaysian upstream exposure and lower regulatory risk, naming Sime Darby Plantation Bhd as a “buy”, with a target price of RM5.76, and Hap Seng Plantations Holdings Bhd
, with a target price of RM2.31.
CPO price movements were marked by sharp swings last year, beginning the year at around RM4,700 to RM4,800 per tonne before sliding below RM3,800 per tonne between April and May.
Prices recovered gradually between June and September to about RM4,400 to RM4,500 per tonne on tighter supply and optimism surrounding Indonesia’s biodiesel roadmap, but weakened again towards the fourth quarter on softer demand sentiment and seasonal output, ending the year at around RM3,900 to RM4,000 per tonne.
The divergence between prices and the Kuala Lumpur Plantation Index from last September onwards suggested that much of the downside had already been priced in by investors.
“Recent CPO price weakness will likely be short-lived, with price recovery to take place soon,” HLIB Research said.
It noted that weather risks are emerging as a key swing factor, with the World Meteorological Organization indicating a 55% probability of La Nina conditions between last December and this February.
Above-normal rainfall in South-East Asia could disrupt harvesting and logistics in Malaysia and Indonesia, while drier conditions in parts of the Americas may delay soybean planting, tightening the global vegetable-oil balance.
Structural constraints on supply growth are also expected to resurface.
Ageing palm profiles, slow replanting and limited land expansion due to Indonesia’s moratorium on new planting since 2018 and Malaysia’s sustainability commitments are likely to cap output.
The Indonesian government’s move to take over more than 674,000ha of oil palm plantations, with another 1.8 million hectares under investigation, may further curb near-term production and investment.
On the demand front, Indonesia’s planned move from 40% to 50% biodiesel blending this year could lift crude palm oil consumption by about three million tonnes annually, while higher biofuel mandates proposed by the US Environmental Protection Agency for this year and next year are expected to support soybean oil prices, indirectly benefiting palm oil through substitution.
