Upcoming tight inventory to support CPO price

KUALA LUMPUR, June 11 -- Expectations of a tight inventory level in the plantation sector due to slower production growth in the upcoming months could lend support to the crude palm oil (CPO) price, which can average at RM3,000 per tonne level this year, MIDF Research said.

It said the CPO futures have rallied to an over 10-year high to above RM4,000 per tonne, amid strong market sentiment and the rally in the soybean oil market.

“We believe the tight palm oil supply situation will likely remain at least until the third quarter of this year (Q3 FY21), given the slow output growth due to labour shortage in our country as well as other Movement Control Order (MCO) restrictions.

“On the demand front, the export momentum has started to show signs of fatigue from India post-Eid festive period and COVID-19 surge in the country,” it said in a note today.

Meanwhile, the research house projects China’s export demand growth to continue after the country approved new standards for premium palm oil.

It also expects export demand to improve on the back of the recovery in economic activities globally and higher export demand from Saudi Arabia after Malaysia clinched a palm oil deal.

On CPO price, it said as of May 21, the average CPO spot price increased by 6.2 per cent month-on-month (m-o-m) to RM4,529.33 per tonne.

The highest CPO price recorded in May was on May 18 at RM4,794.00 per tonne, on the back of stronger soybean oil price, tight inventory level (despite the increase in productions) and upbeat export demand.

Malaysia’s May 2021 palm oil inventory increased by 1.5 per cent m-o-m to 1.57 million tonnes, extending its uptrend for the third consecutive month.

However, on a year-on-year (y-o-y) basis, the stockpiles plunged by - 22.9 per cent due to the lower opening stock of 1.44 million tonnes.

“With regards to the MCO 4.0 implementation in Malaysia from June 1-14, 2021, the plantation sector is allowed to operate at full capacity during the period.

“Hence, we opine that the enforcement of the latest MCO is unlikely to have much impact on palm oil production, but we remain cautious on the production level due to lower workforce and tighter standard operating procedure requirements,” said MIDF Research.

It noted that the labour shortage will lead to delays in the harvesting activities which will impact the quality of fresh fruit bunches, but the incentive for new machinery (under the PEMERKASA Stimulus Package) are expected to help in addressing the labour shortage issue.

Meanwhile, Maybank Kim Eng also maintained its “positive” call on the plantation sector, naming Kuala Lumpur Kepong Bhd (KLK), Sarawak Oil Palms Bhd (SOP) and Boustead Plantations Bhd (BPLANT) as its favourites.

At 12.30 pm today, shares of KLK fell 20 sen to RM21.60, SOP down four sen to RM3.86 and BPLANT was flat at 57.5 sen.

“Barring any weather surprises, we should see huge supplies of the United States’ soybean/ soybean oil in the second half of 2021 (2H21) helping to ease the present tightness in the global supply of vegetable oils.

“Hence, we maintain our view that the CPO’s current high prices are not sustainable going into 2H21 as CPO output is expected to pick up seasonally,” Maybank Kim Eng said.

At the same time, three other research houses -- Kenanga Research, Public Investment Bank (PIVB) and CGS-CIMB Securities Sdn Bhd -- have set a “neutral” call on the sector.

Kenanga Research said that the May inventory data that was released on Thursday by the Malaysian Palm Oil Board came above its forecast.

“The deviation from our estimates was mainly due to lower exports, particularly from Islamic countries, and slower stockpiling activities from China and India, while the production of 1.57 million tonnes is in line with both our and consensus’ estimates.

“For June, we forecast production growth of 1.4 per cent m-o-m, as the growth in East Malaysia is offset by the decline in the Peninsula, and exports to rise 3.1 per cent m-o-m,” it said.

PIVB said despite the record-breaking CPO price levels during the first quarter of 2021, most plantation companies did not churn out similar performances.

“Among the eight plantation companies under our coverage, only 38 per cent or three companies met our expectation.

“Some of them who have significant exposure to Indonesian plantations were dragged by the wide CPO price discount due to the unfavourable CPO export duties,” it said.

Meanwhile, CGS-CIMB said its top Malaysian palm oil picks are KLK, Genting Plantations Bhd and Ta Ann Holdings Bhd.

-- BERNAMA