Yahoo Finance CPO prices to remain relatively range bound in 2023 amid balanced supply improvements and rise in demand: RHB
Hoe continues to favour integrated players like Wilmar while also seeing value in players such as Bumitama Agri and Golden Agri.
Crude palm oil (CPO) prices should stay relatively range bound in 2023 as supply improvements will be relatively balanced with a rise in demand, says RHB Group Research analyst Hoe Lee Leng.
Currently, CPO prices are within the RM3,500-RM4,500 per tonne range. With YTD prices at RM5,218 per tonne, RHB expects average prices for 2022 to come in close to its RM5,100 per tonne assumption.
“Going forward, CPO prices should remain in a similar price range for 2023. While upside risks for CPO prices have moderated in the last few weeks, there are still supportive factors for the commodity that should keep prices relatively stable,” says Hoe.
These include weather uncertainty especially with the ongoing La Niña; the availability of fertiliser from Russia which could impact oilseed crop supply; and growing demand due to discounted CPO prices versus that of soybean oil (SBO) as well as from potential increases in Indonesia’s biodiesel mandate.
“Nevertheless, we note that on the negative front, the palm oil-gas oil (POGO) spread has reversed and discretionary biodiesel is no longer feasible — while the newly passed deforestation-free supply chain law in the EU could impact demand from the EU in the future,” says Hoe.
Although RHB continues to see La Niña conditions with most climate models expecting it to end by early-2023, this has not affected South American soybean planting as much as initially expected, says Hoe.
Brazil, which accounts for 70% of the soybean crop in South America, is seeing close to ideal growing conditions, with planting progress on track at 91% as at Dec 5. However, Argentina is facing a drought, with soybean planting progress being 29% completed — 17% behind last year, as at Dec 2.
As a result, official Argentine soybean output estimates have been cut to 48 million tonnes for 2023 from 55 million tonnes previously, while Brazil’s output is still expected to be strong at 153 million tonnes. Should La Niña last longer than expected, Argentina’s soybean planting could be further at risk while Brazilian soybean quality would be affected, Hoe adds.
Medium-term demand could be at risk
Meanwhile, Hoe highlights that demand should remain robust in the short term, although the discount between CPO and SBO has narrowed. With the recent decline of SBO prices, CPO is now trading at a smaller US$470 per tonne discount, albeit still significantly higher than historical discounts of US$100-US$150 per tonne.
With regards to Indonesia’s biodiesel mandate, the POGO spread has reversed to negative again, with gas oil now being US$22.45 per barrel cheaper than CPO — making it no longer financially feasible to produce biodiesel without subsidies.
On the back of this dynamic in place, Hoe does not expect any discretionary biodiesel demand to come back. “As for mandated demand, Indonesia’s President Joko Widodo has asked its government to create a mechanism to ensure the rollout of the B35 mandate in 2023. This could take some time to implement, given the technical issues and the subsidy formulation. Nevertheless, should this happen, it would result in 1.5 million-2 million tonnes of additional CPO demand per year,” she adds.
Medium-term demand, however, could be at risk with the newly passed deforestation-free supply chain law in the EU. The law will come into force within the next 18 months and could impact demand from the EU in the future as companies who import products like palm oil, soy, cocoa, timber, rubber, coffee, and cattle will have to prove that the products are deforestation-free.
With this, it is likely smaller planters and smallholders who do not have 100% traceability at their estates would not be able to export to the EU come June 2024, says Hoe. “We highlight that, between 2015 and 2021, consumption of palm oil in the EU has already decreased by 35% for food and 12% for biofuels, due to growing concerns on sustainability issues.
“While the consumption of palm oil in biofuel of approximately 3 million tonnes is expected to be phased out by 2030 — with countries like Austria, France and Belgium having already banned palm oil for biofuels — a reduction in food demand from the EU could see palm oil imports of 1.5 million-2 million tonnes also being at risk,” she adds.
In the longer term, the demand for sustainability will also include social issues, given the EU’s proposed prohibition of products made with forced labour. This law is currently in negotiations with the member states and the prohibition will very likely be passed within the next few months and made compulsory by 2024 at the latest, says Hoe.
Overall, RHB finds that the stock/usage ratio trends for 2023 are mixed, but all are above historical averages. This means that stock levels are no longer in a tight position for next year, says Hoe.
For palm oil in particular, while Indonesia is on course to record another year of growth in 2023 of 4.2%, Malaysia’s growth would depend on the fulfilment of foreign labour requirements. As at Nov 30, 14,159 foreign workers have entered the country, or 49% of the initial quotas approved by the government. Despite this, the industry is still short of another 75,000 workers and sector players are hoping for this to be addressed in 2023.
Maintain “neutral”
RHB’s CPO price assumptions of RM3,900 per tonne for 2023 and RM3,500 per tonne for 2024 remain unchanged. Hoe expects supply to improve further in 2024 while pent-up demand seen in 2023 will moderate, leading to lower prices.
RHB maintains “neutral” on the plantation sector with a trading strategy. Hoe continues to favour integrated players like Wilmar International with a “buy” call and target price of $5.40, while also seeing value in players such as Bumitama Agri and Golden Agri-Resources after taking into account their above-average dividend yields. Hoe has a “buy” call on both Bumitama Agri and Golden Agri with target prices of 80 cents and 33 cents respectively.
As at 11am, shares in Wilmar, Bumitama Agri and Golden Agri are trading at $4.15, 60.5 cents and 25.5 cents respectively.
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