Malaysia: Upside support for CPO prices

The plantations sector could be poised for an upcycle should the El Nino weather phenomenon play out as expected.

This may provide support to the upside for crude palm oil (CPO) prices and may benefit upstream plantation players the most, according to UOB Kay Hian (UOBKH) Research.

The research house recommended investors to buy some upstream plantation companies, should the forecasts become reality noting its top picks for the sector are IOI Corp Bhd and Hap Seng Plantations Holdings Bhd.

“El Nino will result in dryer weather for Indonesia and Malaysia, which will negatively impact the productivity of oil palm trees. In the event of an El Nino, palm oil production tends to be lower and is positive to prices.

“The strongest impact to CPO price will only take place when the dryness starts to impact production, which is likely to be in 2024 and the first half of next year depending on the strength of the El Nino,” it said.

However, UOBKH Research expects that even with a mild case, the productivity of oil palm trees will be impacted since some oil palm trees have not been well taken care of over the last three years.

Meanwhile, RHB Research said while CPO prices have recovered in recent weeks on El Nino fears and rising commodity prices, plantation companies’ share prices have not moved as much.

This is likely due to expectations that the El Nino phenomenon will likely be a moderate one, it said.

“We continue to expect a gradual improvement in Malaysia’s palm oil stocks in the coming months, as productivity improves,” RHB Research said.

“We still believe that El Nino needs to be a strong one for CPO prices to move by more than 20%, which would then only have a more significant impact on planters’ earnings.

“In terms of impact to productivity, we only expect this to be seen in 2024,” said the research house, which had a neutral rating on the sector.

RHB Research’s CPO price assumption of RM3,900 per tonne for 2023 is unchanged, but it is soon revising its 2024 CPO price assumption of RM3,500 per tonne depending on the severity of El Nino.

Commenting on the recent palm oil statistics, Hong Leong Investment Bank (HLIB) Research said palm oil inventories remained on the uptrend, rising by 1.9% from the previous month to 1.72 million tonnes in June 23.

The figure is lower than Bloomberg’s estimate of 1.87 million tonnes, due to higher-than- expected exports and lower-than-expected output.

HLIB Research, which has a “neutral” stance on the sector, maintained its CPO price assumption of RM4,000 per tonne for 2024.

Tags: Malaysia, palm oil, forecasts, Эль-Ниньо, plantation, CPO, productivity, Indonesia, oil palm trees, prices, Crude palm oil, Production