Soft demand for CPO can lead to higher stockpile

The soft demand for crude palm oil (CPO) could potentially lead to higher stockpile expectations in the near future.

Citing an independent cargo surveyor Amspec, Maybank Investment Bank (Maybank IB) Research and Hong Leong Investment Bank (HLIB) Research said Malaysia’s preliminary export estimates for CPO shipments in the first 10 days of June 2023 showed falling demand at 275,211 tonnes, or a 18% month-on-month (m-o-m) decline.

“The weaker demand, if sustained throughout June amidst expectation of further output recovery, will likely result in an even higher June stockpile,” Maybank IB said in a report.

The brokerage also suggested that CPO price will be weighed down in the near term if such weak exports persists.

“However, what is worrying is the present soft demand for palm oil as CPO price continues to trade at narrow discounts to competing major vegetable oils and gas oil relative to historical averages,” Maybank IB said, adding that the dull global macroeconomic outlook is seen as a headwind for CPO price in the immediate term.

Meanwhile, HLIB Research attributed the rise of stockpiles to the seasonally higher cropping phase and tepid exports demand arising from the absence of festive-driven demand and palm’s weak price competitiveness compared to other vegetable oils.

Similarly, RHB Research said both Malaysian and Indonesian planters are expecting a recovery in output in the second half of 2023 (2H23), ranging from a mid-single digit to low double digits, on the back of an improved labour workforce in Malaysia and the seasonal peak period.

At this juncture, both HLIB Research and RHB Research made no changes to their CPO price assumptions of RM4,000 and RM3,900 per tonne for 2023, respectively.

On the impact of El Nino, Maybank IB said it likely infuses greater market price volatility on the agricultural commodity market.

“While an El Nino is generally positive for CPO price over a 24-month period (from the onset), it is not a linear uptrend as other factors can influence prices too,” Maybank IB said.

Furthermore, it added that based on its study of past five El Nino occasions, there was no clear trend on fresh fruit bunch yield impact.

“Hence, the impact of an El Nino on production, if any, may only be felt in 2024,” it said.

RHB Research meanwhile noted that planters are not seeing any tree stress currently, citing good rainfall thus far, despite temperatures being higher during the current heat wave.

“Expectations are still high for 2H23’s output based on black bunch counts and improved labour force.

“However, depending on the severity of the El Nino (assuming it comes) there could be an impact on 2024 output,” RHB Research noted.

Moving forward, it expects a gradual improvement in Malaysian palm oil stocks as output continues to rise, although this could be partially offset by restocking activities by China and India.

All research houses maintained their “neutral” call on the plantation sector while HLIB Research, which named IOI Corp Bhd as its top pick within the sector, attributed its “neutral” stance to the absence of a notable earnings growth catalyst.

Tags: export, Crude palm oil, Malaysia, CPO, demand, estimates, stockpile