Medium-term prospects for CPO prices are improving — Analysts
24/10/2022 (The Borneo Post) - KUCHING: The medium-term prospects for crude palm oil (CPO) prices are improving, given the supply risks and improving demand outlook, analysts at RHB Investment Bank Bhd (RHB Investment) viewed in a report.
However, it cautioned that in the short term, however, prices could be largely influenced by Indonesia’s export policies and the impact this would have on Malaysian palm oil stocks. It expected stock levels to normalise further after end-October, once the tax-free levy period ends.
“We expect CPO prices to stabilise at slightly higher levels in 1H23 (once the impact of Malaysia’s labour-affected CPO output is felt on stock levels towards the end of the year), before falling back in 2H23 on the onset of peak output,” it opined.
It explained that CPO prices have recovered somewhat from the lows, but are still held hostage by Indonesia’s export policies. Although Indonesia’s export ban has been lifted, the market is still being disrupted by its tax levy-free period, given rumours that it could be extended until the year-end (from end- October).
“Should this occur, Indonesia will continue to offload its stocks at discounted prices, at a detriment to Malaysian exports. As CPO prices react more to Malaysian CPO monthly statistics, this could be a dampener for prices, in our view, should this eventuate,” it opined.
Nevertheless, it believed supply risks remain and this could bolster prices in the medium term fertiliser availability from Russia and Belarus – which would affect the planting season in South America in November/December, labour shortages in Malaysia – which, if unresolved, could continue to affect crops in 2023, and La Nina – which is expected to last until 1Q23, and could affect vegetable oil supply globally.
Demand is also returning, especially from price-sensitive countries, given the significant discount CPO is trading compared to soybean oil, RHB Investment noted.
“Palm oil (PO) stock levels at importing countries like China, India, Pakistan, and Bangladesh have picked up from the June/July lows.
“Discretionary biodiesel demand and increased mandated biodiesel demand could also push up consumption, given the positive PO-gas oil (POGO) spread. If this dynamic remains in place, discretionary biodiesel demand for CPO of 2.5 million to three million tonnes could come back to the market, which together with a potential increase in demand from Indonesia’s biodiesel mandate increase to B35/40, may result in four million to five million tonnes of additional CPO demand per year,” it added.
All in, RHB Investment maintained its ‘neutral’ view on the sector.