PETALING JAYA: The earnings of plantations companies will be on the back foot for the final quarter of 2023 (4Q23) due to weaker crude palm oil (CPO) prices during the period.
The sector could, however, see a new normal with CPO prices trading between RM3,000 and RM4,000 a tonne due to supportive fundamentals.
RHB Research expects 4Q23 earnings for the sector to decline quarter-on-quarter (q-o-q) and year-on-year (y-o-y) as production output declines post peak season and the down trending CPO prices having a higher leverage on earnings of companies.
Industry insiders expect the bearish forces could remain for much of 2024 but for CPO to hold above the RM3,000 per tonne price level, helped by sustained demand from main markets like China and India, which will help offset weaker exports to developed markets like the European Union.
“Based on the current fundamental factors such as CPO production stagnating at 18 million tonnes to 19 million tonnes in Malaysia, soybean oil prices remaining above US$900 per tonne and palm oil exports remaining stable, the CPO price range of RM3,000 to RM4,000 is considered normal,” said Datuk Dr Ahmad Parveez Ghulam Kadir, director-general of Malaysian Palm Oil Board.
He has no major concerns about Indonesia CPO production, estimated at 46 million tonnes last year, as there is no strong correlation with Malaysian CPO prices, he added.
“Even though Indonesian CPO production keeps increasing every year, their domestic consumption is also on an increasing trend due to their aggressive implementation of the biodiesel industry and higher demand for edible consumption.
“As a result, Malaysian palm oil exports remain stable in the world markets,” Ahmad Parveez told StarBiz.On the supply side, with cultivated area in Malaysia and Indonesia about to plateau, production growth will be driven by better seeds and plantation practices. One major issue is wage pressure.
“Compared with historical levels, one key factor supporting higher CPO prices is cost inflation, especially for labour,” said Akash Gupta, director at Fitch Ratings Singapore Pte Ltd.
Malaysia has a minimum wage of RM1,500 and the government is working towards a progressive wage policy to raise wages of low-income workers.
Akash’s Malaysian spot benchmark CPO price assumption is US$650 per tonne (around RM3,100) for 2024, and US$700 per tonne (around RM3,300) for 2025, as compared to US$830 per tonne (around RM3,950) in 2023.
He expects CPO prices to weaken in 2024 due to higher output as well as pressure from competing oils such as soybean oil.
“We see higher production in Malaysia, with the resolution of labour shortages which were caused by Covid-19-related restrictions. We also see favourable weather conditions for higher yields, at least in the next four to six months across Malaysia and Indonesia.
The effect of a strong El Nino, if it materialises, should start to be felt from late 3Q24 or early 4Q24 onwards. “Lower cost of fertilisers should also help raise output and weaken CPO prices,” he said.
Ahmad Perveez advised to keep an eye on crude oil prices as higher energy prices tend to make palm oil a more attractive option for biodiesel feedstock.
The weak ringgit against the US dollar also makes CPO more competitive than other competing oils.
The major immediate pressure on CPO price could be brewing in the soybean oil market with the price differential between the two edible oils having narrowed to US$200 a tonne from about US$550 a tonne in September last year.
The narrower spread between the two vegoils could lead to buyers opting for soybean oil purchases while Fitch expects this to encourage higher discretionary biodiesel blending.
With the earnings season set to get underway on Bursa Malaysia, RHB Research noted that the 4Q23 earnings of plantation companies could ease due to lower production and pricing power, especially among upstream companies.
“In Malaysia, while average fresh fruit bunch (FFB) output rose by 4.5% y-o-y in 4Q23, spot CPO prices dropped 5.8% y-o-y. In Indonesia, FFB output is estimated to have risen 3.4% y-o-y in 4Q23, but net CPO prices fell 11.1% y-o-y,” it noted in a report yesterday.
That said, the industry’s 4Q23 performance is likely to be largely in-line with its expectations, based on estimates of production levels alone.
Kuala Lumpur Kepong Bhd
may underperform its forecast based on FFB output with FGV Holdings Bhd outperforming while others post numbers that are largely in line.
It added Malaysian companies with downstream operations may see slightly better q-o-q margins due to the decrease in competition from Indonesia.
Unlike Fitch, RHB Research expects a higher CPO price environment in the first-half of the year in anticipation of a seasonally weaker output and the El Nino impact.
The industry’s longer sustainability is an ongoing effort, with Ahmad Parveez noting it has been proactive in diversifying its application portfolio by exploring and investing in alternative markets where the demand for palm oil is growing.
“This includes sectors such as renewable energy, and oleochemicals products by creating eco-friendly products ranging from detergents to personal care items.
The bioplastics industry presents a novel opportunity for palm oil utilisation, offering a biodegradable alternative to conventional petroleum-based plastics. Most importantly, there is a focused effort on enhancing the value of palm oil in the food industry,” he said.
