Malaysia: CPO prices may end up stronger than expected due to El Nino

Crude palm oil (CPO) prices may end up higher than the currently expected average of RM3,700 per tonne for 2023 to 2024, Kenanga Research said.

A key factor is the El Nino phenomenon, which is looking likely by the end of 2023 or early 2024.

Kenanga Research also said fresh fruit bunches (FFB) output is expected to improve seasonally in July to peak in September or October this year.

“If (the El Nino is) severe, our current expectation of a small 2024 global edible surplus can turn into a deficit even with a small fall in palm oil output of just two per cent in 2024.

“Hence, current expected crude palm oil (CPO) prices of RM3,700 per tonne for 2023 to 2024 may end up stronger,” the firm said in a note.

Kenanga Research said so far, the threat of El Nino seems to have provided some support to edible oil prices from easing further.

The firm, however, has yet to raise its CPO price forecasts above its expected range of RM3,500 to RM4,000 per tonne.

Kenanga Research has maintained a “Neutral” stance on the plantation sector as the threat of El Nino is not a foregone conclusion.

However, it said given that the sector is already trading at 1.1 times price-to-book value (PBV) with plenty of negative news reflected into the sector’s equity prices, investors may want to consider some selective accumulation in the event CPO prices and earnings are lifted by a severe El Nino.

“In any case, the market for palm oil should stay robust, underpinned by demand from the food and biofuel sectors.

“Moreover, many players in the sector own land banks with market value worth far higher than their reported book value. Gearing is also low to moderate with several in net cash position.

“While CPO selling prices can be volatile, efficient operators with good cost control can generate healthy cash flows along with decent returns,” it added.

Kenanga Research has picked Kuala Lumpur Kepong Bhd, Perlis Plantations Bhd and Hap Seng Plantations Holdings Bhd as its sector choice.

Similarly, MIDF Research has estimated June’s CPO price to fall by 14.3 per cent or at RM3,251 per tonne level.

However, the firm said the dry spell environments have cushioned the blow.

It noted that in June, the local CPO delivery price jumped to RM3,730 per tonne, but still averaged monthly lower at RM3,525 per tonne following the decrease of other vegetable oil’s prices trend.

“Moving onwards, we forecast that average local CPO delivery prices would close lower by 7.5 per cent month-on-month (MoM) to RM3,260 per tonne in July, or decline by 19.1 per cent quarter-on-quarter (QoQ) to RM3,112 per tonne in the third quarter of 2023 (3Q23) as a result of the peak crop seasonality amidst sluggish demand on no festival ahead,” it added.

The firm has maintained a “Neutral” stance on the sector with CPO target price of RM3,500 per tonne for 2023.

Moving forward, it said a key downside risk for CPO price remains fragile demand outlook on the back inflationary pressure coupled with tight household spending on high base interest rate locally and globally.

It added that narrowed price discount parity between CPO against soybean oil averaged at US$190.2 per tonne, an increase of 100 per cent month-on-month.

Tags: Эль-Ниньо, CPO, demand, prices, Crude palm oil, Outlook, palm oil, forecasts, output