Plantation – Regional
CPO Prices Set for Gradual Uptrend Amid Supply Tightness
The potential supply deficit could support elevated CPO prices in 2024, with marginal production growth in Malaysia offsetting weaknesses in Indonesia and other countries. Global vegoil supply faces constraints due to: a) Indonesia increasing domestic use, b) heightened biofuel usage in key oilseed-producing countries, and c) reduced oilseed crushing. Maintain OVERWEIGHT, and focus on Malaysian plantation companies and companies that have better-than-peers production growth.
• The forecasted supply deficit is set to uphold heightened CPO prices throughout 2024, propelled by the following factors:
a) CPO production is expected to experience marginal growth, primarily due to the impact of El Nino in 2H23. Among the major palm oil-producing nations, Malaysia is likely to stand out as the country with the highest production growth, helping counterbalance weaknesses in other key producing countries such as Indonesia, Thailand and Papua New Guinea.
b) Global palm oil supply faces constraints, with Indonesia increasing domestic use for both biodiesel and non-biodiesel applications.
c) Despite an abundance of oilseeds globally, the availability of vegetable oil in the global market remains tight. This scarcity is attributed to heightened biofuel usage in key producing countries and reduced oilseed crushing due to weakened demand for animal protein.
• Catalysts: Higher crude oil prices, the intensification of El Nino or the resurgence of La Nina, and the possibility of developing countries successfully pushing for stronger economic growth, leading to strengthened currencies that could, in turn, bolster vegetable oil demand.
• Risks include: a) South American soybean crops exceeding expectations, and b) the relaxation of biofuel policies by major oilseed and vegetable oil-producing countries will pose another risk to market dynamics.
• Investment strategy: Maintain OVERWEIGHT with CPO ASP assumption at RM4,200 for 2024. We recommend investors to capitalise on the potential supply deficit in CPO through investment in Malaysia-based plantation companies. This preference is rooted in several factors, including: a) anticipated yield recovery facilitated by increased fertiliser application and enhanced maintenance efforts, with companies augmenting their workforce; b) lessened impact of El Nino; and c) a substantial decline in the cost of fertilisers. • Top picks: Among companies with substantial exposure in Malaysia, IOI Corporation and Hap Seng Plantations are our top picks. Additionally, we favour companies that are poised to outperform their peers due to superior production growth stemming from a younger age profile and/or strategic operating locations that are relatively less affected by El Nino. Notable contenders in this category include Genting Plantations, Bumitama Agri, and Triputra Agro.
