Mid-to-long-term CPO price outlook improving — Analysts

KUCHING: The mid-to-long-term crude palm oil (CPO) price has been viewed as improving as on-going droughts and less fertilisation activity will likely lead to the decline in production early next year and subsequently, the decline of supply.

Kenanga Investment Bank Bhd’s research arm (Kenanga Research) said in a report following the MPOB International Palm Oil Congress and Exhibition 2015 (PIPOC2015) in Kuala Lumpur, “According to speaker Dr James Fry (chairman, LMC International), CPO prices are likely to be on an uptrend, potentially reaching US$600 per metric tonne (circa RM2,540 per metric tonne) by end of the first quarter of 2016 (1Q16).

“This is excluding potential El Nino impact, as on-going droughts and less fertilisation activity will lead to declining production early next year and therefore tightens supply.

“While we agree that 1Q16 is likely to see stronger CPO prices due to the above reasons, we think prices are likely to decline later in the year on seasonal production trends and ample supply of competing soybean oil (SBO), to average RM2,400 per metric tonne (MT) for the full-year,” the research team said.

During his talk, Dr Fry also stressed the importance of mandated biodiesel production to support CPO prices going forward.

He also talked on crude oil’s role as a price floor for CPO prices due to the use of CPO as an alternative fuel.

“We concur, since after the near-disappearance of discretionary biodiesel blending, it now falls to subsidised biodiesel to absorb excess palm oil stocks.

“As outlined in our recent 4Q15 sector outlook, we expect short-term CPO prices to be supported by gasoil prices with a floor of RM2,100 per MT based on an increase of one stardard deviation to the rolling CPO-gasoil premium applied on current gasoil prices,” Kenanga Research opined.

Meanwhile, on the establishment of the Council of Palm Oil Producer Countries (CPOPC), the research team viewed: “While we do not expect immediate impact as the collaboration is still in its early stages, we are long-term positive on the announcement.

“We understand that the countries may also expand discussions into export duty and oleochemical sector policies which should improve the overall outlook on big-cap planters with downstream exposure (which are SIME, IOICORP, KLK, FGV and PPB through Wilmar).”

Of note, the CPOPC aims establish a formal working group with a view to stabilise palm oil prices, promote the benefits of palm oil, harmonise the Malaysian and Indonesian Sustainable Palm Oil standards (MSPO & ISPO respectively), promote sustainable practices in the industry, cooperate on research and development in the industry, and facilitate the private sector Green Economic Zone initiative in Indonesia.

All in, Kenanga Research maintained a ‘neutral’ call on the sector.

“While the generally positive long-term outlook during the conference is in line with our expectations, we are less optimistic in the near-term as we expect range-bound CPO prices, high edible oil stockpiles and likely a soft 3Q15.

“Taking into consideration the recent run-up in planters’ share prices and CPO prices, we opine that investor should consider a ‘sell-on-strength strategy as short-term negative news may soon cut short the rally,” it added.

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