RHB Investment Bank maintained a NEUTRAL stance on plantation sector in the region with a tactically positive trading strategy, as Malaysian palm oil (PO) stocks are expected to drop below 2 million tonne mark.
“We continue to expect a higher crude palm oil (CPO) price environment in 1H24 as we anticipated a seasonally weaker output and El Nino impact,” it said in its Regional Sector Update today (Feb 14).
The research house said Malaysia’s January PO stocks dipped 12% month-on-month (MoM) to 2.02 million tonnes, as output and exports fell 10% and 1%.
“Lower production in the months ahead together with an anticipated stronger demand in the export market could potentially lead to Malaysian PO stocks dropping below the 2 million tonne mark by next month, thus providing a boost to CPO prices.”
It said that the stock-to-usage (S/U) ratio is now at 10.3%, slightly above the 15-year historical average of 10%.
“Although production is set to taper off in the coming months, export market demand may make a comeback in anticipation of the Aidil Fitri festivities and restocking activities as stock levels should run down further.
“As such, we believe PO stocks could drop below the 2 million tonne mark by next month, thus providing support to CPO prices,” it said.
RHB IB said while El Nino has peaked but the impending La Nina could impact palm oil production later this year.
International climate model forecasts indicated that El Nino has peaked and is now declining with expectations of a return to neutral levels by May.
“However, by July to September of 2024, La Niña becomes the most probable category, with a likelihood of 58%. As the last
‘triple-dip’ years of La Nina from 2020 to 2023 were moderate events, there is a chance that 2024’s La Nina could be strong,” it added.
The research house said while the impact of La Nina on palm production is not normally significant, we saw the last three back-to-back years of La Nina having an impact.
This, it said, ranged from from extreme rainfall and flooding in Australia, prolonged droughts in Africa, and the exceptional drought in southwestern United States.
“We would therefore need to monitor the severity of this La Nina and its impact on other crops,” it added.
Meanwhile, RHB IB believes that the demand from India has shifted, as CPO is currently priced at a USD4.22 per tonne, which is premium to sunflower oil and at a narrowing discount to soybean oil (SBO).
India has allowed an extension of the lowered import duty on edible oils to March 2025, initially due to March 2024, in order to address inflationary pressure, which should bode well for demand for India.
“However, price competition will continue to play a part in determining the country’s buying pattern,” it said.
Despite the bleaker outlook for the region, Indonesia’s B35 mandate (mandatory palm-oil based biodiesel blending of 35%) should see 14% year-on-year (YoY) rise in CPO usage in 2024.
It was reported in June last year that the world’s biggest palm oil producer raised mandatory from 30% to 35% in February 2023 but it has not been fully implemented in some areas.
“Indonesia ended the year with only a 2.5% YoY rise in biodiesel production based on B35 mandate, short of the 15% YoY rise target.
“This means that demand in 2024 should rise by another 14% in order to hit the full year B35 mandate. This will take up an additional 1 to 1.5 million tonnes of CPO.
As for the January statistics, palm oil production fell 9.6% MoM, but an increase of 1.6% YoY, as output continued to wane post-peak season.
“The MoM output decline came from all states – with West Malaysia, Sarawak and Sabah down 11.3%, 7.8% and 7.3% MoM.
“Meanwhile, the YoY increase was contributed by Sarawak, an increase of 7.2% YoY and West Malaysia, an increase of 3.7% YoY, offset by Sabah, a decline of 7.1% YoY).
“In Indonesia, production rose 9.2% MoM, lower by 0.9% YoY in October 2023, bringing year-to-date (YTD)-October 2023 output to 10.1%.
“This production trend is in line with reports that the weather has normalised in Indonesia, post dry spell in 3Q23. Exports in Indonesia grew 11.4% MoM in Oct 2023, resulting in YTD-Oct 2023 export growth of 9.2% YoY.”
RHB IB said it continue to like upstream players, with top picks being Ta Ann Holdings Bhd (TAH) and Sarawak Oil Palms Bhd (SOP) in Malaysia, Golden Agri-Resources Limited (GGR) in Singapore as well as PT Perusahaan Perkebunan London Sumatra Indonesia Tbk (LSIP) in Indonesia.
