KUCHING: The possible advent of an El Nino in this region could have a positive impact on crude palm oil (CPO) prices, driven by a potential shortfall in supply, analysts say.
Australian Government Bureau of Meteorology (BOM) have stated that the chances of El Nino occurring in 2015 have increased, while the ENSO Tracker has been raised to El Nino ALERT (from El Niño WATCH), indicating at least a 70 per cent chance of an El Nino occurring this year (previously 50 per cent).
“The timing of this raised El Nino ALERT is almost identical to 2014’s episode but it eventually disappointed the market as the El Nino threat faded in the second half of 2014 (2H14).
“Still, we believe this year could be different and is worth close monitoring. In our view, a clearer picture could shape up closer to June 2015.
“While the sector in general lacks short term re-rating catalyst, the advent of this El Nino may quickly change the sentiment,” Maybank Investment Bank Bhd’s research arm (Maybank IB Research) said in a report.
Meanwhile, CIMB Investment Bank Bhd’s research arm (CIMB Research) said, a severe drought at the palm oil estates will have negative impact on palm oil yields, as the lower rainfall and soil moisture could cause the oil palm trees to change the gender ratio to favour male inflorescences, and abort female inflorescences before the fruits are ripe.
“The impact of drought at the estates on production would only be felt 10 to 12 months and 22 to 24 months later.
“The exact impact on fresh fruit bunches (FFB) yields will depend on the El Nino’s strength and the impact of rainfall patterns in the key planting areas,” it added.
Nevertheless, it pointed out that its study of El Nino events revealed that Malaysian palm oil output rose at a slower rate, with a one-year lag, but CPO prices reacted positively every time El Nino occurred.
“The El Nino event is typically positive for CPO prices as the potential shortfall in supply caused by the drought boosted palm oil prices in the past, especially if the event coincided with low stockpiles,” it said.
However, CIMB Research opined, given that there is currently sufficient stock buffer for edible oils, it does not expect any major spikes in CPO prices unless the major planting areas experience severe droughts.
“In terms of anecdotal evidence on El Nino, Wilmar recently revealed that Australia’s sugar production in 2014 to 2015 may miss estimates as a result of dry weather. Much of Queensland, which accounts for approximately 95 per cent of Australian sugar cane production, received less than half the typical level of rain in January to March 2015.
“We also note that Sabah, Sarawak, Johor and the East Coast states received below-average rainfall in January to February 2015,” it noted.
All in, CIMB Research and Maybank IB Research retained a ‘neutral’ view on the plantation sector for now.