KUCHING: The plantation sector will likely end the year on a low note as crude palm oil (CPO) due to another potential disappointment in the fourth quarter of 2016 (4Q16) output while CPO prices could stay at high levels for the rest of the year, analysts say.
RHB Research Sdn Bhd (RHB Research) yesterday highlighted that CPO prices have rallied of late, likely due to another potential disappointment in 4Q16 output, despite the peak production period.
“If this pans out, CPO prices could stay at the current high levels for the rest of the year,” it said in a research note yesterday.
Among regional planters, RHB Research believed there could be some disappointment resulting from the weak output to be announced in the upcoming 3Q16 results.
However, this is not a solitary incident as worldwide, RHB Research pointed out that CPO output is expected to fall five to six per cent, year-on-year (y-o-y).
It noted that Indonesia’s CPO output fell 8.5 per cent y-o-y year to date in August, which is a further decline from the five per cent y-o-y drop YTD-July.
“We understand September continued to disappoint, which could result in YTD-September CPO output falling by more than 10 per cent y-o-y. Even with an anticipated strong pickup in output in 4Q, we believe Indonesia may end the year with a decline of one million tonnes of CPO (down three to four per cent, y-o-y).
“We believe that this, together with Malaysia’s estimated 10 per cent y-o-y decline in CPO output, would lead to global CPO output falling five to six per cent in 2016. 3Q16 earnings should be better quarter-on-quarter (q-o-q),” it said.
Nevertheless, it pointed out that despite the lower-than-expected output, it expected the plantation sector’s 3Q16 earnings to be better q-o-q (compared with 2Q16), given the higher fresh fruit bunches (FFB) output q-o-q.
Going into 4Q, it believed planters’ earnings would likely be the highest for the year, given the anticipated continued FFB output recovery and the current quarter-to-date (QTD) average CPO price of RM2,710 per tonne.
All in, it opined, “Should CPO output continue to disappoint in 4Q16, we believe there is room for CPO prices to remain at the current high levels.
“However, our base case assumption is for a recovery in output in 4Q16 and 2017, resulting in a 10 per cent jump in global CPO output (from the low base in 2016). As such, we keep our 2016 to 2017 RM2,500 per tonne CPO price assumption for now.”
RHB Research maintained a ‘neutral’ view on the sector.