Prices To Ease, But Will Remain At Supportive Levels And Deliver Good Profit Margins
Mr Dorab Mistry of Godrej International remains bearish on vegoil prices, especially
towards end-22 as there would be higher supplies of vegoil oil, while demand may not
catch up due to the weak economic outlook. But CPO prices would still remain buoyant
as current supply tightness can ease only if South America delivers bumper soybean
crops in the coming season. There is a risk of a major price correction if the UkraineRussia war comes to an end. Maintain MARKET WEIGHT. BUY HAPL MK and IOI MK.
WHAT’S NEW
• Mr Dorab Mistry from Godrej International remained bearish on CPO prices and expects
CPO prices to weaken to RM4,000/tonne by 4Q22. This is mainly supported by:
a) Good production from Indonesia. Mr Dorab remains upbeat that Indonesia’s CPO
production for 2022 may add on another 3m tonnes (instead of the initially forecast 2.5m
tonnes) on the back of ideal rainfall and good weather this year. Despite the current
labour crunch, Malaysia’s CPO production for 2022 is expected to come in at 19m tonnes
(+0.9m tonnes from 2021).
b) Expect Black-Sea tensions to ease. This is on the assumption that the Russia-Ukraine
war does not continue past another 90 days, which will result in sunflower seeds/oil
returning to global market by 3Q22. Having said that, Ukraine’s sunflower seeds has
found its way into Europe over the last three months. Thus the tightness is not as bad as
market perceived.
c) Demand destruction. The current high vegoil prices have dampened demand where
he estimated about global vegoil demand for 2022 will be reduced by 2m tonnes. The
demand for vegoil may worsen if the Ukraine-Russia war continues, since there is already
limited sunflower oil available in the market. On top of that, a potential recession in 2023
may further defer the demand recovery. Mr Dorab believes the demand for palm oil might
only return when the CPO FOB price is at US$1,200/tonne level (especially from India).
• Prices will remain elevated. CPO prices will remain supported by the supply tightness due
to the bad weather in 2020 and 2021. The global oilseeds and vegoil tightness will only see
a more balanced demand-supply scenario if South America is able to deliver bumper crops
in the coming 2022/23 season. South American soybean will only hit the global market in
2Q23, which also provide the support to the elevated prices in early part of 2023.
• Maintain MARKET WEIGHT. With the current palm oil market situation and limited supply
from Black Sea, we expect CPO prices will remain elevated for 2022 and into 1H23. We
still prefer Malaysian upstream players as they have benefitted from the destructive
Indonesia policies.
• Our top pick would still be Hap Seng Plantation (HAPL MK/BUY/Target: RM4.00), as it will
benefit the most from much higher spot market prices and suffer the least in terms of labour
shortage. Among the big cap plantations in Malaysia, we prefer IOI Corporation (IOI
MK/BUY/Target: RM5.15) as it has the highest Malaysia exposure as well as higher refining
margin as compared with other big-cap plantation companies.