PETALING JAYA: Malaysia’s palm oil industry is expected to see a production recovery soon, amid a higher ouput cycle, according to Public Investment Bank Research (PIVB Research).
“The strong crude palm oil (CPO) price trend has indeed surprised the market given the persistent low inventory levels. Nevertheless, we think there will be strong resistance for CPO prices to go up further as we see a production recovery soon amid higher production cycle,” it said.
Palm oil inventories saw a surprise drop in February on the back of an unexpected production contraction while exports fell to a 14-year low, according to the research house.
As a result, CPO futures prices skyrocketed to an all-time high of RM3,974 per tonne following the positive data.
Contrary to market expectations, palm oil inventories fell 1.3% month on month to 1.3 million tonnes, mainly due to a decline in production and a pick-up in domestic consumption and stock-to-usage ratio saw a dip to 8.9% from 9%.
PIVB Research highlighted that palm oil exports – which fell the most ever in January – saw a further decline of 5.5% to 0.9 million tonnes, the lowest export level since 2007.
It said the weaker demand was mainly due to China (-26.1%), India (-1.4%), Pakistan (-45.7%) and the US (- 53.1%), while demand from the European Union rose 11%.
“The weaker demand was likely attributed to shorter working month while China had a long holiday break during the Lunar New Year. Nevertheless, there is little sign of export demand picking up this month as data has shown palm oil exports dropping 22% in the first 10 days.”
Similarly, the research house noted that CPO production softened by 1.9% on-month to 1.10 million tonnes, the lowest since February 2016 despite expectations of a recovery. Production in Peninsular Malaysia rose 6.9% but fell 11.3% in East Malaysia.
“We believe the steep decline in East Malaysia production was due to the more severe worker shortages as foreign workers returned to their home countries through various channels.”
On the flip side, it said, China’s soaring soybean demand collided with an unexpected shortage in global inventories, pushing up soybean prices by more than 60% in the past 12 months, the biggest rally in at least six years and the highest levels since 2013.
With such tight supply, the soybean oil-palm oil spread rose to US$216 per tonne, the widest since 2013.
Against this backdrop, CGS-CIMB said it expects a pick-up in production in second-half 2021 as yields recover from adverse weather conditions.
“We project palm oil stocks to rise by 0.3% month on month (mom) to 1.31 million tonnes by end-March 2021, with output and exports projected to rise by 15% and 20% mom, respectively. We expect CPO prices to trade in the range of RM3,200-3,900 per tonne in March 2021.”
It is keeping its neutral rating on Malaysian planters, with Genting Plantations and Hap Seng Plantations as its top picks.
Likewise, PIVB Reseach is remaining neutral on the sector, preferring pure upstream players such as Sarawak Plantation, Ta Ann and TSH Resources.
Palm oil inventories saw a surprise drop in February on the back of an unexpected production contraction. – REUTERSPIX
