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Mixed Prospects for Plantation Sector

HLIB Research maintained its CPO price assumption, forecasting an average of RM4,000 per tonne in 2024.

Analysts are maintaining a “neutral” stance on the plantation sector, citing the absence of clear catalysts and a landscape of mixed prospects.

Hong Leong Investment Bank Research (HLIB Research) said the palm oil industry faced ups and downs in 2023.

The research house said, although there was a brief recovery in crude palm oil (CPO) prices after hitting a low of RM3,331 per tonne in early June, the upswing was short-lived.

“The recovery could not be sustained as high stockpiles in Malaysia, a decline in global sunflower oil prices and elevated vegetable oil reserves in major palm oil importing countries failed to lift demand for palm oil,” it noted.

AmInvestment Bank (AmInvest) Research also said, at this juncture, the prospects for the plantation sector are mixed.

Positive factors include resilient demand from China and healthy biodiesel consumption in Indonesia, while negative factors consist of higher output in Malaysia and Indonesia, as well as weak demand from Europe and India.

The research outfit said it would upgrade the sector to “overweight” if CPO production is lower than expected.

Factors that could lead to a poor CPO production include tree stress, dry weather, diseases and a shortage of workers.

“Currently, there is no indication of tree stress. Also, the shortage of workers in Malaysia has been alleviated by a massive recruitment exercise from late-2022 to mid-2023,” AmInvest Research noted.

According to HLIB Research, the weak sentiment sent 2023’s CPO spot prices lower by about 11%, bringing average CPO prices to RM3,832 per tonne in 2023 against an average of RM5,126 in 2022.

However, the brokerage highlighted that, notwithstanding the weak performance of CPO prices, the Bursa Malaysia Plantation index concluded the year slightly higher, up by 0.5% at 7,008 points.

This performance, exceeding the FBM KLCI by 1.8%, was primarily attributed to investors’ optimism regarding the lagging impact of El Nino on palm oil output expected in 2024.

HLIB Research expects the lackluster CPO price sentiment to persist in the next few months, possibly until the second quarter.

The projection is based on several factors, including the unattractive price discount of CPO against soybean oil, with a value of US$258 per tonne at the end of 2023 compared to three-month and six-month averages of US$367 and US$499, respectively.

An unfavorable palm oil-gas oil spread that hamper palm-based biodiesel blending and elevated stock levels in key vegetable oil-importing countries, particularly China and India, are also contributing factors.

HLIB Research, however, believes the CPO price sentiment will likely improve once El Nino’s lagging impact on palm production is felt, likely by the end of the first half of 2024 (1H24) or early 2H24.

“Depending on intensity and timing of the occurrence, weather anomalies arising from El Nino will in turn result in lower fresh fruit bunch yield through bunch failure, floral abortion and prolonged male flowering phase,” it noted.

According to the research house, during the most recent two El Nino episodes, which occurred in 2009-2010 and 2015-2016, the impact on CPO yields was felt eight or nine months after the occurrence.

HLIB Research maintained its CPO price assumption, forecasting an average of RM4,000 per tonne in 2024.

Similarly, AmInvest Research anticipates an average CPO price of RM4,000 per tonne in 2024, which implies a trading range between RM3,500 and RM4,500 per tonne.

The research house said the improvement in CPO prices in 2024 is expected to be underpinned by strong demand from the biodiesel industry in Indonesia.

AmInvest Research said Indonesia’s biodiesel consumption is expected to rise by 16.5% to 11.7 million tonnes in 2024, mainly due to the full year impact of B35 fuel.

Indonesia started implementing a programme to use biodiesel with 35% blend of palm oil-based fuel, known as B35, from February 2023.

“Although B35 was rolled out in February 2023, it was only implemented in August as the infrastructure was not yet ready. Indonesia’s biodiesel consumption was estimated at 10 million tonnes in 2023,” the research firm said.

Both research houses have maintained their “neutral” stance on the plantation sector, while HLIB Research has named IOI Corp Bhd and Hap Seng Plantations Holdings Bhd as its top picks within the sector.


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