KUCHING: With crude palm oil (CPO) prices pegged to remain stable at RM2,400 per metric tonne (MT) in the first quarter of 2018, on the back of an anticipated robust demand and stocks levels picking up from February 2018 onwards, analysts see many signs for a recovery for the sector.
Kenanga Investment Bank Bhd (Kenanga Research) saw that plantation stocks held its own against CPO prices last year, reflected in the KL Plantation Index’s stable performance in 2017.
The stocks appreciated by 1.5 per cent despite CPO prices plunging 26 per cent as production started to show recovery.
“In contrast, as CPO prices jumped 45 per cent in 2016, the KL Plantation Index rose by only 3.3 per cent on weakening yields,” it said in a note yesterday.
“Note that the index is increasingly turning less volatile against CPO prices given the high degree of institutionalisation of the index, and we expect this trend to continue.
“Looking ahead, we do expect prices to continue tracking movements in palm stocks.”
Assuming production volume matches that of 2015 and demand growth of circa 11 per cent, Kenanga Research projected 2018 stocks to start declining up to Feb 2018 followed by an extended stock uptrend, before the seasonal production downtrend leads stocks to soften in December.
Accordingly, it expected CPO prices to maintain at circa RM2,500 per MT in 1Q, before seeing weakness to circa RM2,200 to RM2,400 levels in 2Q and 3Q, before recovering closer to RM2,400 over 4Q.
“With production likely to meet or exceed the previous high set in 2015 at 19.96 million MT, we believe export demand is the prime price driver for the year ahead, rather than stocks, which would likely maintain above the psychological two million MT mark for the most part.”
It cited potential supporting factors for CPO include stronger-than-expected La Nina impact and extended support from higher crude oil prices.
Year on year (y-o-y), Kenanga Research opined that 4Q17 earnings could come in flat against 4Q16 as a good expected production recovery is offset by a drop in CPO prices.
“Similarly, quarter on quarter (q-o-q) could see flat performance with slight production improvement offset by lower CPO prices,” it said.
“Nevertheless, planters with Indonesian exposure such as TSH Resources Bhd, IJM Plantations Bhd, Genting Plantations Bhd and Kuala Lumpur Kepong Bhd may have a slight edge, as 4Q18 tends to be the peak production quarter.
“Meanwhile, Sabah planters should see some relief as we expect better-than-average y-o-y production recovery by circa 12 per cent and q-o-q improvement of about eight per cent.”