Near-term Palm Oil Prices To Rebound But Unlikely To Go Back To Previous Peak
Thomas Mielke of Oil World is expecting palm oil prices to recover as the recent 30%
correction is not justifiable with supply still tight and at these prices, demand is
returning as well with better demand from the biofuel segment. However, he expects
prices to be lower in 2022/23 on the back of a stronger supply but will still be at a
supportive level as conventional demand is returning from both the food and fuel
sectors. Maintain MARKET WEIGHT. BUY HAPL MK, IOI MK and TAPG IJ.
WHAT’S NEW
• Expect short-term price rebound… Mr Thomas Mielke, MD of Oil World shared that the
slump in CPO prices over the past three weeks had been overly reacted during our palm oil
webinar yesterday. He expects some price rebound in the near term mainly attributed to: a)
relatively tight supply (due to the limited exports from Indonesia), b) pent-up demand from
the consumption countries with its current low inventory and attractive pricing, and c)
additional biofuel demand with the widening palm oil–gas oil (PO-GO) discount.
• …but agri-commodity prices to be lower in 2022/23, where CPO will be the price leader
on the back of higher global supply where he expects the 17 oils & fats production to
increase by 2.9% yoy for 2022/23 (+7.1m tonnes), where palm oil production is expected to
accelerate by 3.9% yoy for 2022/23(+3.0m tonnes). On top of that, Thomas is also expecting
soybean surplus (gaining market share and planted areas from grains due to lower fertiliser
cost) and canola/rapeseed is also expected to recover in 2022/23 under the assumption of
normal weather.
• Lower agri-commodity prices in 2022/23 will lead to higher vegoil demand… With the
expectations of lower global agri commodity prices, Thomas expects the demand for 17 oils
& fats to increase by at least 6m tonnes globally. He highlighted that there is a potential
increase in edible oil consumption by 4-5m tonnes worldwide (especially from China, India,
Pakistan and India which contributed about 3m tonnes) mainly attributed to the more
affordable pricing.
• …and higher biofuel demand which provides supporti. With the widening PO-GO price
discount, Thomas expects additional demand for the biofuel segment. The discretionary
demand for biofuel would easily increase by 1.5m-2.0m tonnes due to price competitiveness
against crude oil prices.
ACTION
• Maintain MARKET WEIGHT. Despite our expectation of a CPO downtrend in 2H22, we
reckon that CPO prices would still remain high, supported by the slow exports from
Indonesia (logistic issue) and the tight vegoil situation in 2022.
• Adjusted our valuations. We have rolled over our valuations for Malaysian companies to
2023 to better reflect the CPO price downtrend; we expect a lower average CPO price of
RM4,000/tonne for 2023 vs RM5,200/tonne for 2022. We had rolled over our valuations for
Singaporean and Indonesian companies in our previous note. Maintain BUY on Hap Seng
Plantation (HAPL MK/BUY/Target: RM2.80) and IOI Corporation (IOI MK/BUY/Target:
RM5.15).
ESSENTIALS
• Some other catalysts to monitor include:
a) Indonesian government intervention. Thomas urges the Indonesian government to
allow open market pricing for palm oil. If this happens, it may be a short-term bearish for
palm oil given the high inventory level in Indonesia (Thomas expects Indonesia inventory
level to be 8m tonnes as of early-Jun 22) which would be flushed out into the global
market. Having said that, Thomas highlighted that this would be the only way for CPO
prices to be supported and stabilised in the medium term.
b) Uncertainty in Ukraine where Thomas expects a sharp decline in Ukraine’s crops
(especially sunflower) which results in a huge carry forward stock from 2021/22 to
2022/23. Thomas does not expect the export corridor between Ukraine-Russia to be
open; thus, there will be sluggish exports and high inventory by end-22.
c) Better-than-expected soybean production. Soybean planted area may come in higher
than expected as farmers may turn from planting feed grains to soybean. This is mainly
due to the lower fertiliser cost to plant soybean vs feed grain and hence allowing higher
soybean production. Thomas had also mentioned that the current soybean meal prices
are very attractive as compared with feed grains meal which might stimulate more
soybean crushing, which may result in lower soybean oil prices.
d) Food vs Fuel? Thomas reckons that current CPO prices are getting more competitive for
biofuel and he expects more demand to come. Having said that, if countries cut the
biofuel mandate to stave off inflation, Thomas reckons that one might need to watch the
development of crude oil prices closely. If the crude oil prices soften slower than palm oil
prices, then it will still continue to support CPO prices. Based on Thomas’ forecast, the
potential non-discretionary blending for palm oil is at about 2.5-3.0m tonnes for 2021/22.
• Palm oil has lost its growth dynamics over the last three years. There has been a
lower-than-expected palm oil production worldwide since 2018/19. Thomas mentioned that
Malaysia had at least lost 4.0m tonnes below its potential due to lower yield, lack of new
plantings and labour shortage. The labour shortage issue in Malaysia has caused harvest
loss and reduction in fertiliser application which resulted in lower yield and poorer fruit
quality. For Indonesia, the yield has also started declining (mainly coming from
smallholders).
ASSUMPTION CHANGES
• CPO ASP assumptions. We maintain our CPO price assumptions at RM5,200/tonne and
RM4,000/tonne for 2022-23 respectively.
• We have rolled over our valuation for Malaysian companies to 2023 to better reflect the CPO
price downtrend.
SECTOR CATALYSTS
• Higher-than-expected US green diesel demand.
• Stronger-than-expected commodity cycle.