PETALING JAYA: Crude palm oil (CPO) prices will likely remain elevated for a while, possibly into the end of the first half of 2022, if not longer, according to Hong Leong Investment Bank (HLIB) Research.
WhileHLIB Researcht makes no changes to its CPO price projections for now, given the fluid situation, it believes that the commodity prices will likely surpass its 2022 to 2024 projections of RM4,300, RM3,300, RM3,300 per tonne respectively.
HLIB Research said CPO prices are forecast to remain elevated due to palm supply disruption in Malaysia, which will likely persist into the next few months, as well as output uncertainties on major oilseeds (such as soybean, corn and sunflower seed) arising from the Russia – Ukraine conflict and drought in South America.
“Also, the Indonesian government’s recent move to raise domestic market obligation (DMO) to 30% will further tighten supply of vegetable oil in the export market,” said the research unit.
On March 10, 2022, the Indonesian government had further restricted exports of palm oil products, via the increase in DMO volumes to 30%, from 20% previously.
HLIB Research said although the Malaysian Palm Oil Board projects CPO output in Malaysia to improve by 4.9% to 19 million tonnes in 2022, this depends on timely arrival of foreign workers into Malaysian shores, and sufficient fertiliser application (which remains a big question mark, particularly among the smallholders amidst fertiliser shortage).
Meanwhile, a prolonged conflict between Russia and Ukraine will impact supply of fertilisers (hence impacting vegetable oil output), given Russia’s leading position in the world’s supply of fertiliser and related raw materials such as urea, ammonium nitrate and potash. HLIB Research maintained its “overweight” stance on the plantation sector, underpinned by high near-term CPO prices which will in turn translate to good near-term earnings prospects, easing environmental, social, and governance concerns, and decent valuations.
Based on its estimates, every RM100 per tonne rise in its CPO price projection will lift earnings forecasts for plantation stocks under its coverage by 3.5% to 15%.
The research unit’s top picks remain FGV Holdings Bhd (target price: RM2.43); IOI Corp Bhd (target price: RM5.09), Kuala Lumpur Kepong Bhd or KLK (target price: RM32.43) and Sime Darby Plantation Bhd (target price: RM5.95).
Meanwhile, Maybank Investment Bank (IB) Research said the recent fertiliser price rally is supply side driven, adding the supply crunch was due to United States and European Union (EU) sanctions on Belarus in 2021.
Belarus accounted for 17% of global potash trade in 2020.
Also, the Covid-19 pandemic caused some fertiliser production facilities to run below optimal capacity in 2021. The surge in energy prices especially natural gas (feedstock for ammonia) has caused EU plants to be not cost competitive and the EU shutdowns are expected through the first half of 2022.
The research unit said for oil palm growers, besides rising fertiliser cost pressure, there were challenges in securing fertilisers due to disrupted supply in second half of 2021.
“For some, they have brought forward unused fertiliser that was not applied in time in the fourth quarter of 2021 due to heavy rainfalls.
“Hence, the cost pressures will be more apparent in the second half of 2022 once growers fully exhaust the cheaper fertiliser supplies purchased from last year,” said Maybank IB Research, adding that given the present lofty CPO and palm kernel prices, growers will be able to absorb these cost pressures.
Source: The Star