Lower CPO output in 2024 likely to lift price sentiment
25/10/2023 (The Star Online), Petaling Jaya - The high palm oil stockpile in major palm producing countries that will likely peak soon, favourable palm oil–gas oil (Pogo) spread and lagged impact of El Nino on palm production, are expected to support crude palm oil (CPO) price from 2024 onwards.
Hong Leong Investment Bank (HLIB) Research said CPO price has been trending down recently, bringing year-to-date average to RM3,866 per tonne.
It said this was triggered by several bearish factors including seasonally higher palm cropping pattern, high vegetable oil stock level among key vegetable oil-consuming countries, as well as weak demand sentiment for vegetable oils, including palm oil.
“We expect palm oil stockpiles in Malaysia and Indonesia to peak soon, once the seasonally higher cropping pattern ends – expected by October and November 2023.
“We note that Pogo spread has reversed to negative territory since August 2023, as CPO prices ease.
“A negative Pogo spread will likely lend support to CPO prices, as it means improved blending margins in producing palm-based biodiesel, hence raising demand prospects for palm oil, especially when such Pogo spread prolongs,” the research house said in a report yesterday.
HLIB Research said the arrival of El Nino has been confirmed by world major meteorological organisations since June 2023 and is expected to remain until the second half of 2023 (2H23).
The impact of El Nino on palm production is projected to kick in by the end of 1H24 or early 2H24.
“In general, El Nino causes lower rainfall, higher temperatures and abnormally dry weather in South-East Asia, including Malaysia and Indonesia.
“Depending on the intensity and timing of the occurrence, weather anomalies arising from El Nino will in turn result in lower fresh fruit bunch (FFB) yield through bunch failure, floral abortion and prolonged male flowering phase,” the research house said.
“During the recent two El Nino episodes, which happened in 2009 until 2010 and in 2015 until 2016, its impact on CPO yield was felt eight to nine months after the occurrence.
“While the last two El Nino episodes did have a positive impact on CPO price, the timing of price impact is more dependent on major palm producing countries’ stock levels, in our view,” it added.
HLIB Research changed its 2023 CPO price assumptions to RM3,850 per tonne, or lower by RM150, due to weak CPO price sentiment recently.
The research house raised its 2024 CPO price assumption to RM4,000 per tonne, or by RM200, as it expects lower CPO output, likely by the end of 1H24 or early 2H24, to lift CPO price sentiment.
HLIB Research is maintaining a “neutral” outlook for the plantation sector, with IOI Corp Bhd as its top pick with a target price of RM4.66.
“We maintain our earnings forecasts, target prices and ratings for now.
“We will only adjust earnings forecasts, target prices and ratings on individual planters to reflect our new CPO price and FFB output assumptions in the upcoming results season – starting from November 2023,” the research house said.