Raising 2022E CPO ASP to MYR4,100/t
CPO price may possibly peak in 1Q22
We raise 2022 CPO ASP forecast to MYR4,100/t from MYR3,200/t after a confluence of factors that have driven present CPO prices to above MYR5,000/t. We maintain our view that high CPO prices may not sustain once supply normalizes, likely in 2H22. Except for KLK, we are keeping EPS forecasts, call and TP for our other stock coverage pending updates on their FFB output and cost expectations during 4QCY21 results release. Stay POSITIVE on the sector. Preferred BUYs are KLK, SOP, and BPLANT.
YTD CPO prices driven up by multiple factors
Since our last CPO price revision in early Nov 2021, prices have been on a tear for multiple reasons:- 1) CPO output has remained tight in supply as 4Q21 output fell short of market expectations, especially in Indonesia; 2) South American crop prospects have deteriorated sharply over the past 2 months due to the drought experienced in the southern part of Brazil and Argentina on the La Nina phenomenon; 3) crude oil prices have surpassed USD90/bbl, in part due to geopolitical tensions; 4) cost pressures have been rising, especially from high fertilizer prices. High fertilizer prices and disruption in global supplies also cast uncertainties over the application of fertilizer (especially by smallholders) which may impact oil yields further out; 5) labour shortages in Malaysia persist with foreign workers yet to return; and 6) Indonesia’s latest export policy announced on 27 Jan 2022 requiring exporters to set aside 20% of industry’s export
volume for domestic market obligation has raised some concern over the availability of palm oil in the global market, at least, in the short term.
A possible two halves in 2022 for CPO price
The confluence of factors above drove CPO price to record levels, above MYR5,000/t in recent weeks. We do not expect the present high prices to sustain. But in the immediate term, we do anticipate CPO price to stay lofty as the industry is in its seasonally low production cycle, limiting available supply. Industry output is likely to pick up from Q2 onwards. For the oilseeds perspective, South America’s new harvest will hit the global market from March onwards. US planting season will start in April and given the recent rally in soybean prices and high fertilizer prices, there is a good chance that US farmers may prefer more soybean planting (see Figs.7-8 for soybean/corn ratio) as soybean requires less fertilizer than corn. Assuming US farmers prefers to plant more soybean (than corn) this season, and assuming favourable weather (as La Nina is forecasted to end by mid-2022; Fig.9) in the northern hemisphere, supply will play catch up in 2H22. The seasonal uptick in CPO output is also typically in the 2H of the calendar year. As and when supply normalizes, CPO price will start to ease. As for demand, present high prices will likely lead to some demand destruction especially those of price sensitive consumers. We have also seen some countries (such as Brazil, and Thailand) cutting back on their biodiesel blend mandates. Overall, following the good start to the year, we now raise our 2022 / 2023 / 2024 CPO ASP forecasts (per tonne) to MYR4,100 / 3,200 / 3,100 (from MYR3,200 / 3,000 / 3,000) respectively. Our earnings, calls and TPs (ex-KLK – see link) will be reviewed during the upcoming results season.