The Borneo Post (10/07/2020) KUCHING: Analysts are neutral on the near-term prospects of the plantations sector as uncertainties remain despite a recovery seen in crude palm oil (CPO) prices and palm oil exports.

The research team at Hong Leong Investment Bank Bhd (HLIB Research) saw that CPO price has recovered by more than 20 per cent since early-May to RM2,426 per metric tonne.

This brings year to date average CPO price to RM2,446 per mt, fuelled by optimism arising from easing lockdown measures in major economies and Indonesia’s reinforced commitment to its biodiesel mandate.

“Despite the recent optimism, we maintain our average CPO price projections of RM2,350 to RM2,400 per mt in 2020 to 2021, as current CPO price may not sustain into the next few months,” it said yesterday.

“This is due to several reasons including heightened concerns on the Coronavirus Disease 2019 (Covid-19) resurgence, demand recovery from China may not be as strong as pre Covid-19’s level, narrower price gap between CPO and soy oil, and feasibility of discretionary biodiesel blending remains inexistent.”

The easing lockdown measures among major economies — in particular, US, EU, and China, which are also major consumers of edible oils — have reignited optimism on edible oil consumption, hence driving prices of edible oils (including palm oil) higher.

“However, recent surge in Covid-19 cases globally has heightened concerns on resurgence of the pandemic, hence posing threat on demand for edible oils (including palm oil), particularly from major economies,” it added.

HLIB Research also pointed out that demand recovery from China might not be as strong as pre Covid-19 level.

“While China’s demand for edible oil (including palm oil) will continue to recover, we believe the demand recovery will likely be gradual, as the gradual recovery in China’s hog production will likely result in more soybean being crushed as livestock feeds, hence resulting in lower demand for palm oil,” HLIB Research added.

Kenanga Investment Bank Bhd’s research team also believed that demand disruption from a Covid-19 second-wave remains an undeniable risk.

“To elucidate our point, we highlight that India has added 23,932 new Covid-19 cases (as of July 5, 2020), while the country has only tested 0.7 per cent of its population (compared with Malaysia’s 2.5 per cent), outlining the disparity and the undeniable potential of a second-wave.

“In fact, major countries in Asia that import Malaysian palm oil have all only tested less than one per cent of their population. Bangladesh and Pakistan, have reported 2,738 and 3,191 new Covid-19 cases and have only tested 0.5 and 0.6 per cent of their population respectively as of July 5, 2020.

“Overall, we expect supply to outstrip demand in 2H20, leading to burgeoning stockpiles, which should exert pressure on CPO prices,” it said.

It also noted that exports to China remains a wild card.

“We believe Malaysian palm oil exports to China for June 2020 spiked circa 50 per cent month-on-month (m-o-m) which is mainly due to its low palm oil inventory (5M20: down 28 per cent y-o-y, lowest YTD) and the zero per cent palm oil export tax for June to December 2020.

“At this juncture, the spike in demand from China could be unsustainable after palm oil inventory replenishments have been completed as the country should ramp up US soybean purchases to honour the US-China phase 1 trade deal. We believe it is in the interest of both countries that the phase 1 trade deal is upheld.

“There is also a seasonality factor as China typically ramps up soybean imports from US during the fall season and after South America’s harvesting season. Note that in mid June 2020, US Department of Agriculture (USDA) confirmed soybean export sales of 390,000 MT (compared with US soybean imports of 491,000 MT for the entire May-2020) for delivery to China during the fall season.

“However, in the event of a US-China trade deal fallout, we do not discount the possibility that China could turn to palm oil as a substitute to soybean oil. Moreover, a new swine flu virus claimed to have certain properties that gives it pandemic potential has been reported by Bloomberg in China.

“The potential of outbreak among the swine herds, and transmission to humans could discourage the consumption of pork and could ultimately reduce soybean crushing activities, building a case for palm oil demand as a substitute to soybean oil,” it explained.

Read more at https://www.theborneopost.com/2020/07/10/uncertainties-remain-for-planters-despite-improving-cpo-prices-exports/