Supply disruption, lower stockpiles to support CPO price

KUCHING: Support for crude palm oil (CPO) price could come from an anticipated supply disruption due to extended Movement Control Order (MCO) and lower stockpiles level.

Researchers at Kenanga Investment Bank Bhd (Kenanga Research) made this assumption but added that CPO price is likely to experience short-term turbulence.

This comes as in March 2020, the average CPO spot price retreated by minus 11.6 per cent month on month (m-o-m) to RM2,373 per metric tonne (MT) primarily in view of the sharp plunge in export to India due to a trade spat and expected Covid-19 led demand destruction in major palm oil consuming countries.

However, on a year-over-year basis, the spot price rose by 25.2 per cent year on year (y-o-y), mainly driven by the lower stockpiles level and tighter supply of CPO,” it said in a sectoral yesterday.

“Note that at current price of about RM2,400 per MT remains favourable to most plantation companies as the cost of production is normally below RM2,000 per MT>

“Moving forward, we expect the anticipated supply disruption due to extended MCO and lower stockpiles level to continue to support the CPO price.

Nonetheless, we believe there might be price instability in the short-term dependent on the severity of the demand loss from the coronavirus lockdowns.”

Affin Hwang Investment Bank Bhd (AffinHwang Capital) said earlier on, the anticipation of tight supply-demand dynamics and lower stock/usage ratios of eight vegetable oils, including palm oil, had helped lift CPO prices from mid-October 2019 to January 2020, hitting a high of RM3,100 per MT in early January.

“However, CPO prices have since retreated and are hovering at the RM2,300 to 2,400 levels,” it observed.

“We maintain our CPO price assumption for 2020-21E at RM2,100 to 2,200 per MT, given our more cautious stance on the demand outlook and a weak crude oil price environment.

“We believe the catalyst for CPO prices in the short term will be the supply disruption and current relatively low stocks.

Meanwhile, the downside to our CPO forecast would be the prolonged uncertainties in the market due to Covid-19 and low crude oil prices.”

AffinHwang Capital expect the global economy to slow down for the coming quarters, partly due to the Covid-19 pandemic, and this could potentially have an impact on demand for vegetable oils, including palm oil.

“Less gatherings/events, higher unemployment rate and lower disposable income could potentially lead to lower consumption of edible oils, in our view,” it opined.

Moving forward, Kenanga Research expect the CPO price to trend lower towards its 2020 average CPO price target of RM2,450 per MT.

“We expect inventory level to remain under pressure as demand loss due to coronavirus lockdowns in major export markets and India-Malaysia trade spat might outpace the production level.

“There is also concern that the palm oil-based biofuel is losing its appeal in view of the subdued crude oil price.

Nonetheless, we do not expect a drastic decline in CPO price towards the RM2,000 per MT level.

“We view that CPO price to be mainly supported by the supply constraints as a result of closure of plantation operations in Sabah and the extension of MCO until the end of April.”

This is predicated on the reduction of workforce by half during the MCO which could lead to slower movement and lower collection of FFB during the period, it said.

In addition, the restocking activities ahead of the major Ramadan festival and possible gradual recovery of economic activities in China could partially support export demand.

“Taking into consideration all the above-mentioned factors, we are maintaining our neutral stance on the sector.

Source: Borneo Post

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