Crude palm oil (CPO) price could be heading towards a recovery, according to local and international investment banks.
This assumption was brought about by the expected drop in palm oil inventory and production in the second half of the year.
Hence, investors have been advised to accumulate plantation stocks given the expected growth in earnings once the CPO price picks up in the latter part of the year.
Capital Economics Ltd, Intesa Sanpaolo and Maybank Investment Bank Bhd (Maybank IB) expect a pickup in CPO price by the second half of the year.
They said share prices of plantation firms had been at the low and earnings remained lacklustre in the first quarter of this year — the fifth consecutive quarter of profit decline year-on-year.
The second quarter of this year would still see a depressed CPO price, they added.
Based on Bloomberg data, palm oil inventory this month has dropped below 2.5 million tonnes, a level not seen since July last year. The stockpile then rose to 3.2 million tonnes in December last year before falling again.
Bloomberg data also showed a flat CPO production growth at 1.6 million tonnes this month.
A Bloomberg survey shows CPO price is forecast to increase to RM2,100 per tonne by the fourth quarter from RM2,050 per tonne in the second quarter.
Maybank IB said CPO price was likely to trend higher in the second half of this year as a slowdown in Malaysia’s output was taking shape, albeit slowly.
“We stand by our earlier view that this year’s output growth will slow from the second quarter as oil palm trees in the region enter into a biological rest mode after nearly two years of good harvest post the last major El Nino, and due to a lack of fertilising work by smallholders in the second half of last year on poor CPO prices,” it said in a note.
This would help CPO price to strengthen in the later half of the year, it added.
“We think investors should look beyond the weak results in the first quarter given the cyclical nature of the business.”
The research firm said the CPO price downside was currently limited by the wider-than-usual price discounts of palm oil against Argentina’s soya oil and EU’s (Germany) rapeseed oil.
It said the discretionary demand for palm biodiesel could still increase during summer in the Northern Hemisphere despite retracement in Brent oil price as the palm oil futures and gas oil futures spread made economic sense even without subsidies.