20.05.2021 (www.thestar.com.my) - PETALING JAYA: The current bull run in the crude palm oil (CPO) spot prices, which soared 134% to the historic level of RM4,761 per tonne is not sustainable and is poised for a correction by the second half of the year, say plantation analysts.

However, they said CPO prices for 2021 and 2022 are expected to be traded higher of between RM2,700 and RM3,200 per tonne compared with the low of RM2,022 per tonne in 2020.

Public Investment Bank (PIVB) Research, in its latest report, said the long rally has caught most industry players by surprise as the current palm oil fundamentals could not warrant such a price level.

“Despite the bullish price momentum, we think it is not sustainable and a price correction would be inevitable once the inventory level sees a strong pick-up.

“We think the price of CPO could potentially drop below RM3,500 per tonne after September when the ample supplies kick in, ” it said. Having said that, PIVB has raised its CPO price forecast to RM3,200 per tonne for 2021 from RM2,500 per tonne previously in view of the strong price momentum in the first half of this year.

The research house has also revised its CPO price forecast to RM2,700 per tonne for 2022 from its earlier forecast of RM2,500 per tonne.

“Following our upward revision in the 2021 CPO price forecast, we have raised our FY21 earnings per share forecast by 22%-63% for plantation companies which are under our coverage.”

It suggested that investors look at small mid-cap plantation companies that can give more attractive upside compared with the big cap planters.

Despite the sharp rally in the CPO prices, PIVB noted that there was little share price reaction for most plantation counters given the poor liquidity and increasing concerns over environmental, social and governance (ESG) practices.

“Since end-2019, almost all plantation companies under our coverage have seen a decline in foreign shareholding, indicating that the foreign funds are gradually shifting away from the plantation sector that has weaker ESG practices, ” it said.

Meanwhile, TA Securities, in its note to clients, expected the price of CPO to taper off in the second half of 2021, underpinned by higher stockpiles, increase in global edible oil supply, and the easing of excessive speculative interest in the food commodities derivatives.

“Subsequently, we expect the price to rebound in 2022 with higher demand. Anticipate this bullish trend to sustain in the long run as we believe the consumption of edible oil would resume and this would boost palm oil demand post the Covid-19 pandemic.” The research house observed that the palm oil stockpiles have declined to a very low level before the 2007-2008 global financial crisis, which is similar to the current situation.

“The CPO price has bottomed out as the stockpile climbed to its peak in November 2008.

“In a nutshell, we opine that what happened during the 2007-2008 global financial crisis could repeat during the Covid-19 pandemic, ” said TA Securities.

The research house pointed out that the KL Plantation Index was underperforming the FBM KLCI by 3% amid increasing CPO prices.

“We attribute the disparity between the CPO price and the share prices of local plantation counters to the ESG issues as investors are placing greater concerns on long-term sustainability.

“However, the rebound in plantation stock prices this month reflected market optimism over the first quarter 2021 earnings, ” said TA Securities.

TA Securities’ CPO price assumptions remained unchanged at RM3,000 per tonne for 2021 and RM3,050 per tonne for 2022.