KUCHING: The crude palm oil (CPO) price movement could have limited upside potential.
Affin Hwang Investment Bank Bhd (AffinHwang Capital) in a report yesterday said the recovery of fresh fruit bunch (FFB) yields, a stronger ringgit and weak crude oil price could potentially capped the CPO price rise.
Besides, it outlined that export taxes and levies imposed by the Malaysian and Indonesian governments on CPO and processed palm oil as well as potential import duties should also cut into realised selling prices for plantation players.
“CPO prices are currently on the uptrend but there are a few moderating factors. FFB yields should recover when the El Niño events end,” it said in a note yesterday.
“Additionally, with plentiful global stock of soybeans, the soybean-oil-premium-to-CPO ratio is also an important determinant as low premiums tend to cap CPO prices rise due to substitutions.
“After the recent spike in CPO prices, the soybean oil premium remains low at around US$77 per metric tonne (MT) against the average of around US$105 per MT in 2015 and a high of US$386 per MT in 2012.”
It also noted that a weaker ringgit had contributed to firmer CPO prices before the on-going El Nino event became the dominant factor.
AffinHwang Capital opined that even though prospects of significantly lower production until around June 2016 are currently driving CPO prices higher, further strength in the ringgit could be a drag on future CPO price movement.
Apart from that, the research firm observed the Brent crude oil price has strengthened to around US$41 per barrel.
A significant retracement in crude oil prices, it said, will likely widen the already-large palm-oil premium.
Moreover, the research house believed any shortfall in the estimated usage of 2.0 million to 2.5 million MT of palm oil for biodiesel production in Indonesia should also weaken CPO prices.
Hence, the research firm reiterated its CPO average selling price (ASP) assumption of RM2,400 per MT for 2016 to 2017.
While CPO prices might average around RM2,600 per MT in the first half of 2016 (1H16), it expects CPO price to ease as extreme dry weather ends and production picks up in 2H16 and 2017.
Export taxes and levies as well as potential import duties should also cut into realised selling prices of planters, thereby limiting the pricing of CPO.