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PETALING JAYA: Crude palm oil (CPO) futures on Bursa Derivatives Exchange rallied to an eight-year high at RM3,420 per tonne on Thursday before closing lower at RM3,344 per tonne.

This came amid exceptionally low palm oil stocks to be carried over to next year and low soybean inventory.

With CPO trading above RM3,000 per tonne mark in recent weeks, this is a boon for plantation companies, particularly those with cost of production around RM1,500-RM1,800 per tonne of CPO.

According to UOB Kay Hian (UOBKH), the total combined palm oil inventory in Indonesia, Malaysia, India and China at end-September stood at nine million tonnes, which is 31% lower compared with at the end-December last year.

The inventory level is also not expected to increase significantly over the next four to six months, said the research unit in its latest report. Palm oil competitor, soybean oil is facing similar tight inventory situation ahead of the next US planting season.

UOBKH said “the stronger-than-expected soybean demand from China has led to four months of downward revision on soybean stock-usage ratio by the US Department of Agriculture (USDA).

“Even with Brazil’s soybean planting catching up fast with the recent rain, this does not dampen the bullish sentiment as 60% to 70% of this production has been sold to China, ” the research house explained.

UOBKH also envisaged that CPO prices would be traded higher in the first half of 2021, as the supply of the commodity would continue to remain tight.

“However, we see some weakness in CPO prices going into the second half of 2021 (2H21) on the back of strong production recovery, ” it added.

UOBKH is maintaining a market weight on the regional plantation sector as it expects the higher CPO prices may not be fully translated into profits. “This is considering the lower production in the fourth quarter of 2020 and even into the first half of 2021.

“While the high CPO prices may stay for now, we cannot overlook the volatility that arises from the high prices, ” UOBKH noted.

The potential drawbacks includes demand rationing, higher output in 2H21 and the cooling-off in demand from biodiesel as the supply of used cooking oil is set to increase with the reopening of the hotel, restaurant and catering sectors.

The research unit pointed out that “The narrowing discount of CPO prices to soybean oil prices may see demand shifting to soybean, while it may also not be able to recapture the market share that was lost to sunflower oil in early 2020.

In addition, CPO production is staging for a good recovery, especially in 4Q 2021, with higher rainfall volume in 2020 and better yield recovery from the lack of fertiliser application in the second half of 2018 and 2019.

“Prices will react negatively ahead of the potential inventory build-up, ” added UOBKH.

It is worth noting that palm oil is currently trading at a US$10 per tonne premium to soybean oil. Last month, palm oil was trading at US$30 to US$40 per tonne discount to soybean oil.

UOB Kay Hian has also raised its CPO average price to RM2,650 per tonne in 2020 and RM2,600 per tonne in 2021 respectively.

Given its higher CPO price assumptions, the potential sector earnings upside in 2021 will be 12%, 11% and 28% for Malaysia, Singapore and Indonesia companies, respectively.

It noted that pure upstream players will benefit the most and the top three companies with the highest earnings adjustments are Sime Darby Plantation Bhd, Hap Seng Plantations Bhd and Astra Agro Lestari (AALI) due to their larger planted areas and higher production.

“Investors should also look at pure upstream players with Malaysia-only operations like Hap Seng Plantations Bhd, Sarawak Oil Palms Bhd and Kim Loong Resources Bhd, as they would benefit from higher selling prices, ” added the research unit.

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