CPO prices have soared more than 130% to the historic level of RM4,700/mt after hitting the low of RM2,022/mt a year ago. The unexpected strong rally was contributed by i) soybean oil price rally, ii) tighter CPO supplies in the market, iii) low carry-over and iv) the impact of quantitative easing measures. Despite the sharp rally in the CPO prices, there was little share price reaction for most plantation counters as we attribute this to poor liquidity and increasing concerns over ESG practices. In view of the better-than-expected CPO prices in 1H21, we revise up our 2021 CPO price forecast from RM2,500/mt to RM3,200/mt, raising our EPS forecast by 22%-63% across plantation companies under our coverage. We also reduce our PE multiple for Sime Darby Plantation and FGV Holdings by 2x (34x and 20x, respectively) to reflect their weaker ESG practices. Our top picks are Sarawak Plantation, Ta Ann and TSH given their more attractive valuations and stronger-than-average FFB production growth. Maintain Neutral on the sector as we think current CPO prices are toppish and we see downside risk in 2H 21.
i) Soybean oil price rally. Soybean oil, which is the closest substitute of CPO, has surged more than 130% to USD1,397/mt over the past one year. The steep gain also pushed the CPO price higher as wider premium also makes CPO demand more appealing.
ii) Tighter CPO supplies in the market. Following the drastic hike in export levy and export duty in Dec, there was a significant drop in CPO supplies from Indonesia as the high taxes imposed by the government has discouraged the Indonesian CPO producers from exporting directly, in its attempt to support the downstream products especially biodiesel. This makes Malaysian CPO an attractive choice for India, which prefers to import CPO instead of refined CPO given the presence of sizeable refining capacity in the country.
iii) Started on a low carry-over. Malaysian palm oil industry started the year of 2021 with a 23-year low inventory level of 1.26m mt. Although production has outpaced export growth in some months, inventory level only delivering small progress every month with an average growth of 5% to the current level of 1.54m mt.
iv) The impact of quantitative easing measures. In response to the covid-19 crisis that triggered a deep economic downturn of uncertain duration, majority of the countries rolled out quantitative easing programme or stimulus measures amid the low interest rate environment, boosting the money supply into various global investment products from cryptocurrency, commodity to stock markets. Institutional Investors especially the commodity traders and hedge funds used the cheap money to inflate most investment products from bitcoin (+403%), crude oil (+104%), soybean oil (+130%), copper (+90%), lithium (+270%), nickel (+44%), steel rebar (+92%) to technology stocks. CPO futures were not spared as well as it has soared more than 100% YoY.
USDA expects global vegetable oils to grow by 4% in 2021/22, with gains for all nine major vegetable oils. The gains are primarily driven by palm, sunflowerseed and soybean oils. Global food consumption is forecast to expand by more than 3% or 4m mt while global industrial consumption is forecast to grow by over 2m mt or 4%, driven by expanding US biodiesel production. Continued strong demand for vegetable oil pressures global vegetable oil ending stocks to their lowest level since 2010/11.
Palm oil remains the largest vegetable oil consumed globally for food and industrial use. Meanwhile, global palm oil production in 2021/22 is forecast to rise with a strengthened pace compared to the prior year. Indonesia accounts for much of the production growth. Despite global production outpacing consumption, ending stocks continue to fall as stock levels recover from 2020/21 consumption exceeding production levels. The relentless rally in the soybean oil is increasing palm oil’s appeal as the cheapest edible oil as the palm oil-soybean oil spread has expanded to USD429/mt, the widest level in 12 years.
Palm oil’s closest substitute, soybean, is expected to see its production to reach 386m mt, up 6% from 2020/21. While it remains below this year, it is still above the long-term average for annual production growth. Nearly all production growth is limited to the US and Brazil, which account for roughly two-thirds of global production with similar expansion expected in area planted. Production increases are primarily a result of larger planted area, spurred by the highest prices since 2014. New plantings in Brazil are expected to be record high for the second year in a row as a FX rate enhances producer returns. Plantings in the US are currently forecast to be the largest since 2018 but face stronger price competition with corn as farmers allocate huge acreage for soybean plantings this spring.
With expanding production, global soybean supplies will reach record levels. Exports will continue to be driven by China demand, which is projected to account for 60% of global consumption.
India’s vegetable oil level currently stands at 1.6m mt level, which is relatively low compared to the 10-year average of 1.8m mt. India is also Malaysia’s largest palm oil importer, making up 20%.
Source: PublicInvest Research - 19 May 2021
How can Super Cycle end so fast when we have huge liquidity, low interest rate & high inflation leh ??
The super cycle when continue as long as there is low interest rates & huge liquidity low!
2021-05-20 14:53
As I said earlier, the spike in palm oil price is not sustainable. The price has grown from the low of rm 1800 from mid 2019 to 5000, an almost 2.8x increase .
2021-05-20 17:35
No problem
We don't play cpo future
If Cpo can sustain above Rm3,000 for a prolonged period already good for stocks like Thplant
Thplant production cost is only Rm1,465
So at Rm3,0000 per ton Thplant is making 100%
2021-05-20 18:51
If Cpo goes above Rm3500 for a longer period will be a huge bonus
So we shall see how things unfold months still ahead
2021-05-20 18:52
High CPO price can't really help this industry. Labour shortage causes low production. Too rely on India, but India can't handle covid-19 at all.
2021-05-20 21:09
labour shortage no problem for these companies as they got palm oil plantation in Indonesia with abundant workers to harvest palm fruit
Tsh Resources
IjmPlant
Azrb
Thplant
Others
Latest news is Indonesia achieved highest export of palm oil products for April 2021 since year 2008
Can expect the result of Tsh Aug 2021 and others to improve significantly
2021-05-20 23:03
Look at Tsh quarter results just release is it better than previous quarter? Now tsh shares collapse I already said don't chase plantation shares is better to bottom fish steel counter. All steel counter will show better profit but not all plantation counter will show better profit.
2021-05-21 09:49
calvintaneng
3 important Factors overlooked
1. Drought and super typhoons havoc for crops last year in China bread basket and India Maharastha state bread basket
This will cause huge disruption to supply
2. Joe Biden pivoting to biodisel push up sugar, corn and soybean as ethanol fuel
Philip 66 converted crude oil refinery to biodisel
3. Structural change
Good year tyres will shift from using crude oil to soybean oil as manufacture of all tyres
All these are Structural change in demand for both Soyoil and Palm oil
So see the overall picture from a higher level
Longer term palm oil will be a stable green energy source that is 100% renewable
2021-05-19 10:02