Neutral call: Analysts expect CPO to stay supported above RM2,100 per tonne if crude oil stabilised around US60-US70 per tonne.

16/07/2015 (The Star) - The opposite pull of higher production and better export outlook in the coming months is expected to limit the price upside of crude palm oil (CPO) in the second half of this year, said analysts.

They expected CPO to likely stay supported above RM2,100 per tonne if crude oil stabilised around US$60-US$70 per tonne. Currently, CPO is trading between RM2,200 and RM2,250 per tonne range.

To date, almost all brokerages in their latest reports have placed a “neutral” call on the plantation sector.

CIMB Research in its latest report said plantation companies were expected to report weaker second-quarter earnings in 2015 on year-on-year basis as “the 10% rise in CPO output will only partly offset the 15% drop in the local CPO price for the same period.”

However, the research unit said second-quarter earnings should be much better than the first quarter and that the 39% quarter-on-quarter bounce in output should more than offset the slight 3% drop in the average CPO price, it added.

“We advise investors to be selective in their stock picks,” said CIMB Research, which favoured Singapore-based First Resources Ltd, Genting Plantations Bhd and Indonesia-based PT Salim Ivomas Pratama Tbk.

The research unit noted that CPO production would likely pick up again next month which could cap any potential price rally on weather concerns.

“Overall, we expect weather and macro events to be the key drivers for near-term prices, i.e. the recent bounce in soybean prices was due to concern that the excessive rain across US Midwest has damaged crop conditions and could reduce harvest,” it said.

CIMB Research is also maintaining its average CPO price forecast of RM2,230 per tonne for 2015 and RM2,450 for 2016 respectively.

JF Apex Securities also has a “neutral” call with a positive bias on the plantation sector.

It expects the seasonal high production in the second half to keep the upside of CPO prices limited but viewed the advent of El Nino to serve as a catalyst to CPO prices.

“We estimate CPO prices to hit RM2,400-RM2,500 per tonne should the El Nino risks strengthened as the dry weather would hurt crop production,” it added.

Meanwhile, Maybank Kim Eng said the weak CPO fundamentals were being held up by the potential return of a strong El Nino in the second half.

“Weather indicators continue to suggest that a confirmed El Nino is gaining strength; it will peak sometime in two to three months and may last till early 2016.”

An El Nino typically brings below average rainfall to this region that could result in lower CPO output (although with some time lag), boosting prices.

“Palm oil exports may also gather momentum if El Nino also affects soybean crop development in the US and South America in the second half of this year.

“Furthermore, a strict enforcement of Indonesia’s B15 programme (funding mechanism is in place) from next month could help boost the CPO price as well,” it added.

It also said the current CPO price discount to the US soyoil at US$139 per tonne, compared with the past 12-month average of US$88 per tonne had improved palm oil’s price competitiveness vis-a-vis soyoil.