RHB’s Regional Sector Update maintains UNDERWEIGHT sector call on the palm oil plantation, premised on the expectation that the ESG discounts are here to say and dampening investor appetite for plantation stocks.
The Malaysian Palm Oil Council (MPOC) expects Indian demand for palm oil to moderate in 2022, on the back of the prevailing high prices, higher domestic production and the current import duties, which favour soybean oil.
MPOC expects India’s palm oil imports to be 5% lower in 2022, to 8.2m tonnes. The main reason for this is the current high CPO prices, which is inhibiting demand. Secondly, India is expected to record higher domestic oilseed production in 2022 (estimated at 10-15% growth, coming mainly from rapeseed output), which will dampen import demand. Thirdly, the current import duty structure favours crude soybean oil (SBO) as the duty imposed on SBO is 5.5%, 275bps lower than duty imposed on CPO (8.25%), while refined PO is subjected to a higher duty of 13.75%. Given the negligible SBO-CPO price gap currently, it is relatively cheaper to import SBO in India.
Moreover, the MPOC is positive on the potential of Indian Government to meet its long term target to increase self-reliance for edible oils as part of its national mission. With a financial investment of USD1.49bn over a period of five years, the Indian Government is targeting to raise the domestic production of CPO to 1.12m tonnes by 2025-2026 and 2.8m tonnes by 2029-2030.
With the rising inflationary pressure, as edible oil prices remain high, the Indian Government has taken various measures to curb inflation such as reducing import duties, imposing stock holding limits, as well as suspending trading of futures and options contracts for edible oils, oilseeds and agricultural products. India’s import duties on edible oils are the Government’s main tool to reduce inflationary pressures, and changes to the rates have been occurring more regularly over the last year.
RHB expects this year’s fundamentals of supply to improve, with a moderation in CPO prices in 2H22, while valuations will remain dampened by ESG risks.
