06.07.2018 (The Edge Markets MY) - Plantation sector
Maintain neutral: We see better prospects for the second half of 2018 (2H18) and maintain our average crude palm oil (CPO) price assumption of RM2,500 for 2018, supported by: i) a weaker ringgit, which is supportive of palm oil prices; ii) the Indian government’s recent move to raise import duties on other soft oils, which will boost India’s demand for palm oil in the coming months; and iii) a potential re-emergence of El Nino, which will lend support to palm oil prices. We maintain our average CPO price assumption of RM2,500 per tonne for 2018 and 2019, and our “neutral” stance on the sector.

The CPO spot price averaged at RM2,420 per tonne in 1H18, 17.6% lower than in 1H17, due to several factors. The factors included: i) increasing palm oil supplies arising from more planted areas graduating to mature and/or higher-yielding brackets (in particularly, Indonesia) and the absence of weather-driven supply disruption; and ii) heightened concerns about a trade war arising from the trade spat between China and the US.

Hong Leong Investment Bank’s economic research expects the ringgit to weaken in 2H18 (versus 1H18), as it expects uncertainties over global trade policy and divergent monetary policy actions (arising from lower-than-expected economic growth in other advanced economies) to have led to currency depreciation pressures in some emerging economies, including Malaysia. A weak ringgit (against the US dollar) augurs well for palm oil prices, as it strengthens the price competitiveness of palm oil against other competing oils (in particularly, soybean oil, the major competing oil, which is denominated in US dollars).

The Indian government’s recent move to raise import duties on crude and refined soft edible oils (which include soy oil, sunflower oil and rapeseed) has narrowed the duty gap between palm and other soft edible oils, hence boosting India’s demand for palm oil in the coming months.

According to Australia’s Bureau of Meteorology, the warming of the Pacific Ocean (since April 2018) has led to a 50% chance of an El Nino event developing later this year. An El Nino episode (if it happens) will have a lagged impact on palm oil production, hence lending support to palm oil prices.

While we expect CPO prices to trend higher in 2H18, we still see challenges in the sector over the longer term, which include, among others, a potential minimum wage hike which will affect Malaysian planters’ cost of production and earnings. — Hong Leong Investment Bank Research, July 5