El Nino could keep CPO prices elevated at RM3,800-4,200 per tonne, says MIDF

El Nino events, which are expected to constrict the supply side, will keep crude palm oil (CPO) prices elevated at RM3,800-4,200 per tonne.

However, a fragile demand outlook on the back of inflationary pressure and tight household spending on high base interest rates locally and globally is likely to pose a risk for CPO demand, said MIDF Research in a note on Wednesday.

The research outfit added that the year-to-date (YTD) palm oil closing stocks in major importing countries are still on the high side with India’s stock reported at 76.6% YTD, China at 100%, Pakistan at 69.8% and Bangladesh at 100%.

“Hence, we anticipate demand would be sluggish in 2H2023 (second half of 2023) ahead. All factors considered, we maintain our ‘neutral’ stance on the sector with CPO target price of RM3,500 [per tonne],” the firm said.

MIDF’s top pick for the sector is Kuala Lumpur Kepong Bhd (KLK), with a target price of RM24.60.

“We like KLK for its efficiency as it is the most efficient planter with the highest oil yield of 4.7/ha (per hectare). It also has the highest FFB (fresh fruit bunch) yield/maturity of 21.4/ha among peers,” MIDF said.

In addition, it said after acquiring IJM Plantations Bhd, KLK’s total land bank in Malaysia and Indonesia has increased by 73,827 ha to 279,037 ha, with around 66,503 ha (24%) of young mature area coming into maturity ahead.

MIDF Research, which attended the panellist session at the East Malaysia Palm Oil Conference 2023 on Tuesday, further stated that El Nino/La Nina can change the supply-demand equation and trigger a major price movement.

“Experts are predicting a moderately strong El Nino from August 2023-March 2024 (+95% chance). Additionally, early signs of dryness have been detected in parts of Indonesia — Kalimantan — in August due to the current developing El Nino. Hence, this would usher CPO price to hinge on a high side for CY2023-2024 (calendar year 2023-2024),” the research firm said, citing Ganling Sdn Bhd director Ling Ah Hong, who focuses on plantation research.

In the panel session, TransGraph Consulting managing director Nagaraj Meda said demand for riskier assets like commodities such as CPO remains weak, as the market is bracing for a mild 2024 recession scenario.