Palm oil supply-demand tightness to remain

Filepic of a worker unloading palm oil fruit bunches from a lorry inside a palm oil mill in Bahau, Negeri Sembilan. A prolonged Covid-19 crisis would dampen palm oil demand of major countries, says TA Securities. (Photo by Reuters)

KUALA LUMPUR: Palm oil supply and demand are expected to remain tight in the near term as the expected fall in demand amid the Covid-19 crisis will be accompanied by a fall in output, say analysts.

“The weak demand is partially offset by tighter supply prospects as some of the soybean and palm oil operations [in Brazil, Argentina and Malaysia] have been reportedly impacted by movement controls,” said CGS-CIMB in a research note.

Findings from a survey of palm oil areas by the CGS-CIMB Futures team revealed that Malaysia’s palm oil output probably grew 1.3% month-on-month (m-o-m) and -22% year-on-year (y-o-y) to 1.31 million tonnes in March.

Malaysia’s palm oil inventory, meanwhile, fell 1% m-o-m and 43% y-o-y to 1.67 million tonnes in March, the lowest since June 2017.

“This marks the sixth consecutive m-o-m decline in palm oil stocks. Over the past 10 years, the Malaysian palm oil inventory fell by 2% m-o-m on average in the month of March,” said CGS-CIMB analyst Ivy Ng.

Ng said the closure of six high-production output districts in Sabah due to the movement control order (MCO) would have a significant impact on April’s crude palm oil (CPO) output from Sabah, which accounts for 25% of Malaysia’s palm oil output.

She forecast CPO output for April to decline by 22% y-o-y due to MCO disruption in estates, on top of insufficient fertilising and ageing estate issues.

Additionally, the research house is likely to cut its 2020 CPO output projection of 19.6 million tonnes by 1.1% should the Sabah government reject appeals by planters to continue harvesting activities in estates.

The weak demand is partially offset by tighter supply prospects as movement controls have been implemented in some countries that concentrate on either soy or palm oil, it said.

As such, CGS-CIMB projected CPO prices to come in at RM2,100 to RM2,500 per tonne in April. For the entire 2020, a price forecast of RM2,300 is achievable as prices averaged around RM2,703 per tonne during the first quarter of the year.

PublicInvest Research shared in a note yesterday that the delay in harvesting will result in the rotting of fresh fruit bunches (FFB). 

As such, a decline in FFB yield would manifest as overripe FFB will cause deteriorating oil quality with an increase in free fatty acids.

“Overripe FFB will also cause more than 50% of fruits detached, making more loose fruits scattered all over the estate,” said PublicInvest Research.

The research house opined that most plantation companies have exposure to Sabah given the fertile soil there.

This includes the big boys such as FGV Holdings Bhd, Hap Seng Plantations Holdings Bhd and Genting Plantations Bhd as well as Kuala Lumpur-Kepong Bhd and IOI Corp Bhd.

In particular, Hap Seng Plantations and Kretam Holdings Bhd would be the most impacted given that almost all of their estates are in the affected areas of Kalabakan, Semporna, Kunak, Tawau, Lahad Datu and Kinabatangan.

Indeed, based on its 2018 annual report, Hap Seng Plantations has some 40,279ha of land in Sabah.

In the case of Kretam, the group has some 23,814.21ha in estates and refinery land in the state, mainly concentrated in the areas subject to the Sabah government’s closure.

PublicInvest Research noted that only Sarawak Plantation Bhd and Ta Ann Holdings Bhd are not affected as they do not have any exposure to Sabah.

CGS-CIMB maintained its “add” call and target price of RM11.90 for Genting Plantations due to the company’s rich land bank and young estates, noting that it has one of the youngest estate age profiles among its big-cap peers in Malaysia.

At the same time, CGS-CIMB noted that its “add” rating on Hap Seng Plantations is based on the company’s current implied low enterprise value per hectare of RM30,000 for its Roundtable on Sustainable Palm Oil-certified contiguous estates in Sabah that are potentially attracting suitors, leading to a share price rerating in the medium term.

Meanwhile, TA Securities said in a report for the second quarter of the year that it expects palm oil exports to pick up as Muslim countries restock for Ramadan.

The research house added that as the Covid-19 pandemic wears off, the consumption of edible oils will resume, thus boosting palm oil demand and support CPO prices.

Moreover, downstream palm oil players would benefit from low feedstock prices as well as cheaper input costs.

TA Securities added, however, that a prolonged Covid-19 crisis would dampen palm oil demand of major countries. Furthermore, a surge in palm oil’s premium vis-a-vis gas oil would make biodiesel unprofitable and thus see reduced biodiesel demand.

Kenanga Research highlighted that Malaysian palm oil exports to China have fallen by 17%, and until the virus truly dissipates, China’s palm oil demand is likely to remain subdued.

“At this stage, the possibility of pent-up demand arising from the consecutive low-buying months resulting in backloaded palm oil demand from China once Covid-19 infections dissipate appears faint,” it said in a note to investors last Thursday.

China’s palm oil stocks in February stood at 1.05 million tonnes — the highest level since 2018 and on a year-to-date basis this year — insinuating the unlikelihood of large palm oil imports, at least for the next one to two months.

Source : The Edge Markets

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