Fitch expects the price of CPO to weaken to around US$750 per tonne in the final quarter of 2023.
KUALA LUMPUR: Weather factors continue to play a key determinant factor for crude palm oil (CPO) yields, which will also impact the commodity’s price in the international markets.
The haze phenomenon also coincided with another frequent dry weather anomaly – the El Nino.
Analysts are expecting that should a severe El Nino occur, prices of CPO could climb higher from the present levels of RM3,715 per tonnne as of Oct 4.
The Australian Bureau of Meteorology, had at the end of last month, confirmed the El Nino phenomenon, suggesting that it is likely to continue until at least the end of the southern hemisphere summer.
On the local front, most plantation analysts’ base case expectations of the El Nino indicated that it should be manageable for the palm oil industry.
RHB Research, in its latest report expected a moderate El Nino, while Kenanga Research had cautioned of a severe El Nino, which may push up CPO prices.
El Nino brings rain to the eastern Pacific Ocean but dryness to the western fronts, including South-East Asia.
In the last serious El Nino of 2015 to 2016, the eastern part of Sulawesi and Borneo along with north-west Peninsular Malaysia saw prolonged dryness.
But upon its assumption that the El Nino will be moderate this time, RHB Research said CPO prices may not move past the RM4,000 per tonne key level for the rest of the year.
“However, in 2024, we expect CPO prices to range higher from current levels to RM4,000-RM4,500 per tonne, once the impact of El Nino starts to affect productivity in the second half of 2024,” RHB Research said.
“We assume that Russia and Ukraine will be able to find ways to export their grains and oilseed products even without the grain corridor.
“Should the two assumptions be proven wrong, we will need to relook at our price assumptions,” it added.
RHB Research said potentially higher CPO prices next year would mean that the pure planters would be looked upon more positively than the integrated players, given the latter’s higher sensitivity to price movements.
Integrated players, meanwhile, would provide a more stable earnings base and consistent dividend returns.
Meanwhile, Rakuten Trade head of equity sales Vincent Lau said CPO prices should hold at near the RM4,000 per tonne level as El Nino might trim production.
“But I don’t think it will be that severe (for the planters).
“Another plus point for the plantation companies is that fertiliser costs have come down significantly and normalised now.
“It is still anyone’s guess but from how things are going, there will likely also be no commodity boom for CPO now,” Lau told StarBiz.
“But if the impact of El Nino becomes more severe, it will eventually affect production, which may translate to lower yields that could lead to higher prices for the time being,” he added.
Commenting on the supply-demand picture, RHB Research said there were rising supply risks on the horizon and demand was still lacklustre.
It noted of the discount between CPO and soybean oil which had narrowed slightly of late to US$543 per tonne from US$650 per tonne last month had made CPO less attractive.
“Meanwhile, palm oil stock levels at major importing countries are now above historical levels, providing less incentive for restocking activities – given the fragile global demand, which in turn stems from a weak economic sentiment,” it said.
“In addition, the competition between Malaysian and Indonesian palm oil remains intense – resulting in the former losing market share,” RHB Research added.
Earlier this week, Kenanga Research said CPO prices would likely remain firm as demand recovered faster than supply.
“We are expecting CPO prices to average at RM3,800 per tonne for 2023 and 2024 as demand is looking to outpace supply growth in 2023 as well as into 2024,” Kenanga Research pointed out.
It pointed out that while global edible oil supply should improve by 2% to 3% in 2023, it would likely be outpaced by a fast demand recovery of 3% to 4% this year.
“El Nino is also here and if it worsens from current expectations of a ‘strong’ El Nino to ‘very strong’, a higher CPO price cannot be dismissed,” added the research house.
“With firm CPO prices expected, margins should also improve after the first half of 2023 as production picks up seasonally while input costs moderate.
“Trading at 1.2 times price-to-book value, the sector’s ratings are not demanding,” it added.
Kenanga Research said the plantation sector’s company earnings should end the year on a high note on a combination of seasonally higher fresh fruit bunch harvest and lower input costs amid relatively firm selling prices.
“Over the last 10 years, 56% of crude palm oil production occurred during the second half of the calendar year.
“This means the relatively fixed upstream cost could be spread over 19% more output in the latter half compared to the first six months of the year.
“A repeat of this trend looks likely for 2023,” it said.
