PETALING JAYA: The plantation sector is expected to make a comeback after two years of a downcycle, as crude palm oil (CPO) prices rebound gradually in anticipation of falling global palm oil inventories, according to PublicInvest Research (PIVB Research).
The research house is upgrading its sector call to “overweight” from “neutral” in anti-cipation of an upward trending CPO prices.
“We raise our average CPO price assumption from RM2,200/mt to RM2,400/mt in 2020, which is a 15% increase from prevailing market prices. We expect CPO prices to start rising towards end-2019 after the peak production season is over,” it said in its note today.
PIVB Research noted that a decline in global palm oil inventories is expected in 2020 on the back of slower palm oil production growth, higher biodiesel consumption and stronger demand from China and India.
“We project Malaysia’s palm oil inventories to fall to two million metric tonnes by mid-2020. Meanwhile, inventories in Indonesia are likely expected to inch down to about three million metric tonnes,” it said.
Palm oil production is expected to be weak due to a number of factors.
“We suspect smallholder plantation, which makes up 17% of Malaysia’s and 40% of Indonesia’s planted area, have cut down the fertiliser application over the last one year due to lacklustre CPO prices. The impact could pose a threat to the national production as it could cause a significant reduction in bunch weight and fruit abortion over the near-term.
“Ripening of fruit bunches should also slow down, making a longer period needed for harvesting. In addition, the prolonged dry weather period during May-Sept could affect the nutrient uptake and cause moisture stress in palms. Depending on the severity, the lagged effect on the production will be seen two years later,” PIVB said.
However, a higher demand from China and India is also expected, due to the favourable import duty policy in India while China has been hard-hit by African swine flu, resulting in weaker demand for soy meal, which is the main feed for their farming industry.
“Consequently, it makes it less appealing to buy soybean for crushing purpose and palm oil would be the most suitable replacement for soybean oil,” the note said.
Meanwhile, Indonesia’s push to increase its domestic consumption of palm oil with a higher biodiesel mandate can generate additional 2.5 million palm oil demand.
“The imposition of anti subsidy duties on Indonesian biodiesel exports by the EU allows Malaysia to take away some market share from its counterpart. Malaysian biodiesel exports registered an impressive 33% year-on-year growth.
“Domestic consumption under the B10 mandate will be extended to heavy vehicles next year, bringing the total biodiesel demand to 1.6 million mt from 1.3 million mt,” it said.
PIVB’s top picks for the sector are Kuala Lumpur Kepong Bhd, Genting Plantations Bhd, TSH Resources Bhd and Ta Ann Holdings Bhd.