El Nino predicted to support CPO price

Despite the uptrend in the palm oil stockpile, most analysts continue to maintain their crude palm oil (CPO) price assumption between RM3,800 and RM4,000 per tonne for the 2023-2024 period.

Hong Leong Investment Bank (HLIB) Research expects CPO prices to be supported by the arrival of El Nino, and potentially stronger near-term demand arising from India’s more active restocking activities ahead of the Diwali festival in mid-November.

In addition, the CPO price competitiveness will improve against fossil fuel, said the research house in a note to clients yesterday.

“Moving into 2024, we maintain our projected CPO price of RM3,800 per tonne, based on the assumptions that El Nino will turn out to be a moderate one and also, El Nino to dissipate at end-2023,” HLIB Research noted.

Given the absence of a notable demand catalyst, it maintained a “neutral” stance on the sector. For exposure, HLIB Research’s top buy pick is IOI Corp Bhd with a target price of RM4.66 a share, given its commendable valuations.

Commenting on the Malaysian Palm Oil Board’s latest August palm oil statistics, the research house noted the stockpile remained on an uptrend, rising by 22.5% month-on-month to 2.13 million tonnes, boosted by higher production and imports, as well as lower exports.

“Moving into September, stockpiles will likely remain flattish, as seasonally higher cropping patterns will likely be offset by potentially stronger near-term demand for palm oil,” added HLIB Research.

The stockpile came in higher than Bloomberg’s survey estimate of 1.9 million tonnes, as production exceeded expectations, while exports fell short of expectations.

RHB Research has also kept a “neutral” call with a tactically positive trading strategy on the sector.

The brokerage in its latest report said its top picks were IOI Corp, Ta Ann Holdings Bhd and Sarawak Oil Palms Bhd.

While the sector’s second-quarter 2023 (2Q23) earnings results were disappointing, it said “the second half (2H23) should improve on better output and lower unit costs”.

A likely pickup in festive demand in the coming months should also be offset by the continued peak season, potentially leading to local palm oil stocks staying above the two-million-tonne mark till year-end, at least, added RHB Research.

“Hence, we make no changes to our CPO price assumptions, which are RM3,900 per tonne for both 2023 and 2024,” it said.

Going forward, RHB Research said both Malaysian and Indonesian planters are expecting a strong recovery in output in 2H23.

This ranges from a mid-single digit to low double digits, with 1H:2H output in the range of 42%-45%:55%-58%.

“Weather is still relatively normal with sufficient rain, and planters are not seeing any signs of El Nino as yet,” added the brokerage firm.

It noted planters were also expecting unit costs to moderate slightly in 2H23 on the back of lower fertiliser prices, although this would be offset slightly by higher fertiliser application as most planters applied less than 50% of their full year requirements in 1H23.

Kenanga Research in its note to clients, meanwhile, said, “We suspect equity prices have already factored in a strong El Nino impact on the sector, which now looks likely to occur.

“Likewise, easier costs in 2H23 are also largely anticipated with overall ratings not very demanding.”

It said the US-based National Oceanic and Atmospheric Administration is now expecting a “strong” El Nino for November 2023 to February 2024.

“The impact on oil palm has been minimal so far but a very strong El Nino can disrupt supply in 2024,” it pointed out.

Kenanga Research also expects planters’ cost pressures to ease.

This is given that the year-to-date fertiliser prices have come off 40% from peak prices during 2Q23, but are still 50% above the 10-year average level, hence not cheap still.

Likewise, diesel cost has also eased but higher wages will stay, it added.

Tags: estimate, Crude palm oil, Malaysia, palm oil, Эль-Ниньо, CPO, stockpile, price, Indonesia