KUCHING: While it remains unclear on how long the Coronavirus Disease 2019 (Covid-19) will persist, analysts believe it will likely be negative on palm oil especially if it lasts for a longer term period.
“It remains unclear on how long would Covid-19 persist and its potential impact on palm’s demand. We believe Covid-19 outbreak will likely have a negative impact on palm oil demand and price (especially if it persists).
“This comes as the World Health Organisation has recently changed its classification on Covid-19 to a pandemic (from a public health emergency of international concern previously), due to the speed and scale of transmission,” the research team at Hong Leong Investment Bank Bhd (HLIB Research) said in its outlook report on the palm oil sector.
Furthermore, the tight near-term palm oil supply could no longer mitigate the potential impact arising from Covid-19 pandemic, which has yet to show signs of easing at the time of writing, and crude oil price slump, which has resulted in widening palm oil-gas oil spread.
“The deterioration in this spread – following the drastic decline in crude oil price – raises questions on viability of existing biodiesel mandates specifically in Indonesia, Malaysia, Brazil, US, and Europe.
“While it seems unlikely for Indonesian government to revise its biodiesel mandate (at least for now, given its plan to increase palm oil export levies to support expansion of its palm biodiesel programme), the risk of such revision in other countries will still cap the upside potential for prices of palm oil and other vegetable oils,” it explained.
As such, HLIB Research revised its assumptions on crude palm oil (CPO) prices.
“CPO spot price has weakened by more than 25 per cent (from the high of RM3,111 per tonne) since January 2020, dragged by Covid-19 outbreak and recent crude oil price slump.
“While we believe near term prices will be supported by palm’s tight near-term supply, the latter could no longer mitigate the potential impact arising from Covid-19 pandemic and crude oil price slump (which has resulted in widening POGO spread), which prompted us to revisit at our projected average CPO price assumptions of RM2,550 per tonne for 2020 to 2021,” it said.
Meanwhile, on the palm oil sector’s performance in the fourth quarter of 2019 (4Q19), the research team noted that quarter-on-quarter (q-o-q), companies under its coverage showed boosted performance mainly driven by higher CPO selling prices.
“Although 4Q was historically a more productive quarter, four out of nine of the companies under HLIB’s coverage reported q-o-q declines in FFB output, and we believe this was mainly due to the dry weather in Peninsular Malaysia region in early 2019, which in turn has resulted lagged impact on Peninsular Malaysia fresh fruit bunches (FFB) production in 4Q19.
On a year-on-year (y-o-y) basis, HLIB Research said performance was lifted by higher realised CPO prices.
As for FFB production, it said FFB production growth varied among companies, with four out of nine of the companies under its coverage reported QoQ declines in FFB output, mainly due to lagged impact from dry weather in early part of 2019, which in turn has impacted FFB output in Malaysia.
“We note that most companies did not fully capture the upcycle in CPO prices during 4Q19, as most companies shared that they locked in CPO sales when CPO prices were at early stage of a run-up.”