UOBKH Research is keeping its prediction that CPO prices will trend higher in 2H24 due to tighter supplies and steady palm oil demand from India and China.
PETALING JAYA: Analysts are maintaining their “neutral” stance on the plantation sector, with pockets of positivity based on a projected increase in crude palm oil (CPO) stockpile in the second half of 2024 (2H24).
In a note published yesterday, Hong Leong Investment Bank (HLIB) Research observed that the palm oil stockpile had remained on an uptrend for the second straight month in June, rising by 4.3% month-on-month (m-o-m) to 1.83 million tonnes, as the slump in exports more than offset lower production.
It said the increase in palm oil supply came in slightly higher than Bloomberg’s estimate, due mainly to lower-than-expected exports.
“Palm oil exports declined by 12.8% to 1.21 million tonnes in June, and we believe the decline was due mainly to palm’s weak price competitiveness over competing oils, and the absence of festive-driven demand.
“According to data published by cargo surveyor Intertek Services, lower exports in June were due mainly to lower exports to Africa, Asia Oceania, China and the European Union,” said the research unit.
The export contraction offset the fall in palm oil production, which incidentally fell for the first time since February this year, by 5.2% m-o-m to 1.62 million tonnes in June, due to seasonality since palm oil production usually takes a breather before resuming on its seasonal uptrend in July.
HLIB Research noted that the production decline in June was more apparent in Sabah and Sarawak where the reduction was 6% m-o-m, while production in Peninsular Malaysia fell by a smaller magnitude of 4.7%.
It forecast the uptrend in palm oil stockpile will likely continue into this month, on the back of the continuation of seasonal uptick in cropping pattern, which will likely offset potential higher exports demand arising from palm’s improved price competitiveness against soyoil and the absence of festive-driven demand.
Meanwhile, UOB Kay Hian (UOBKH) Research cited the data from the Malaysian Palm Oil Board which appears to support CPO prices, as the increase in palm oil inventory is slow and likely to remain at the current level for the next few months in view of slower production growth.
The securities firm is keeping its prediction that CPO prices will trend higher in 2H24 due to tighter supplies and steady palm oil demand from India and China.
It added: “Although production came in within our latest estimates, it was below our initial estimate of 1.65 million tonnes. The adjustment was made after the high rainfall in Sabah and Sarawak in late June.”
UOBKH Research pointed out that the rainfall has led to slower harvesting and also lower oil extraction rate at 19.4% last month, compared to the 19.52% for May.
“For 1H24, CPO production was up by 9.9% or 793,000 tonnes year-on-year. This strong recovery was driven largely by improvement in overall labour productivity and yield recovery in Sarawak,” it observed.
Similarly, RHB Research is expecting CPO inventory to continuously increase, reaching the two million tonne mark in the coming months, although it cautioned that the main catalyst to look out for remains the La Nina, whose probability remains high, at 85% in the fourth quarter of 2024 (4Q24).
“The phenomenon is expected to develop between September and November 2024 and then persist through 1Q25 – with an 85% probability. The Australian Bureau of Meteorology has a ‘La Nina Watch’ on currently – which indicates a 50% chance of the prediction coming through,” it said.
While both HLIB Research and RHB Research are “neutral” on the sector, with the former citing the absence of a notable demand catalyst for its outlook, UOBKH Research is keeping its “overweight” call.
The latter is basing its more positive stance on a number of factors, including firm CPO prices and the recovery of by-product prices, lower cost of production supported by better oil yields and strong cash flow which continues to support decent yield for some of the mid-sized plantation companies.
All three research houses have posted “buy” calls on IOI Corp Bhd
, with RHB Research also recommending Sarawak Oil Palms Bhd and Kuala Lumpur Kepong Bhd, while Genting Plantations Bhd and Hap Seng Plantations Holdings Bhd were among the top picks by the other research firms.
