After witnessing soaring global vegetable oil prices in the last four months due to geopolitical tension and the recent ban on palm oil exports by Indonesia, we think the palm oil prices have peaked and seen a potential correction by up to 20% in the next 6 months. Admittedly, we underestimated the extend of the global vegetable oil supply shortage, which resulted in a rally across the commodities. In view of the stronger-than-expected CPO price performance for the first half, we raise our CPO price forecast to RM5,000/mt for 2022 but maintain our 2023’s forecast of RM3,800/mt. As we believe CPO price has reached its peak, we downgrade our call on the plantation sector to Neutral from Overweight.
- Production seen picking up in Malaysia. Palm oil inventories in Malaysia jumped to the highest level in 5 months in April as production of the world’s second largest producer is rising. It is also the first gain in 6 months. We expect to see gradual production growth towards Oct as oil palm trees enter high production season. This will help ease the tight inventory concern.
- Sunflower oil supplies recovering. EU trade group said the situation for EU sunflower oil supplies have improved in recent weeks since after Russia’s invasion of Ukraine, which triggered panic buying across the supply chain. Ukraine, the world’s largest sunflower oil producing country, contributed 48% of global sunflower oil supplies. Sunflower seeds are making their way out of Ukraine by rail and truck, which are being processed within the EU.
- Indonesia’s ban on palm oil exports may be short-lived. Following the Eid ul-Fitr festive celebration, the domestic demand for cooking oil in Indonesia is expected to taper off. There is no reason to keep excess palm oil supplies in the country as it could restrict the palm oil storage system given the swelling reserves. We think the palm oil export ban will be lifted in the near-term given the limited capacity of the palm oil storage in Indonesia. Since 28th April, Indonesia has banned the exports of CPO and refined palm oil products to cool down the domestic cooking oil prices.
- Strong prices led to record soybean plantings. Latest annual survey from the United States of Deparment of Agriculture (USDA) reveals that US farmers intend to plant a record 91m acres of soybeans, a 4.4% increase from 2021, after a 4.6% increase from 2020 to 2021. Meanwhile, USDA’s estimate of 89.5 acres of corn is much lower than the 93.4m acres planted in 2021 and would be the lowest amount of corn planted since 2018 as high cost of fertiliser, which is most heavily used on corn, has resulted in farmers shifting away from corn to other commodities. Combined, the estimated acres for corn and soybeans would match the 2021 record of 180.5m acres. Soybean planted acres In Brazil are expected to grow for the 17th consecutive year, as higher selling prices and favourable foreign exchange are encouraging more aggressive plantings.
Global oilseed production for 2022/23 is projected at 647.1m mt, rising 50.3m or 8% YoY, primarily on growth in soybean South America and the US, as well as rapeseed production in Canada and the EU, more than offsetting losses of sunflowerseed output in Ukraine and Russsia. Global soybean production is forecast at a record of 394.7m mt, up 13% YoY, with Brazil accounting for over half of the increase, up 24m mt to a record 149m mt. Brazil, Argentina and Praguay account for more than 85% production gains on both expanded planted area and higher yields. Partly offsetting higher global soybean and canola produciton is lower oilseed production for Ukraine.
- Under pressure to cut biodiesel mandates. In responding to sharp rises in vegetable oil prices, some European countries have relaxed or suspended their biofuel blending mandates this year. Under the current version of the Renewable Energy Directive (RED), all EU states must have mandates in place that help meet the 27-nation bloc’s goal for renewable fuels to account for 14% of overall fuel consumption by 2030. Oils derived from rapeseed, palm, soy and sunflower crops make up 78% of total biodiesel feedstocks in the EU. For corn, the amount turned into biofuelds in the EU is equivalent to nearly 60% of the volume imported from Ukraine, or nearly a third of Ukraine’s global exports. Cutting those feedstoks out of the EU’s biofuels mix would shield the EU from major supply shortages and would also ease pressure on the global veegetable oil supplies. Meanwhile, Brazil has decided to keep its biofuel mandate at 10% instead of 14% due to high soybean prices and heightening pressure on the final price of diesel.
- Demand destruction due to high prices. Given the current high vegetable oil prices, we believe majority of the buyers adopt “wait-and-see” approach. For the first three months of 2022, China’s palm oil imports shrank 65% YoY to 506,947. As current crop prices remain high, China’s buyers will remain cautious amid slowing feed demand as they want to wait for the new US crop to lock in lower-priced soybeans. China soybean processing has slowed to levels unseen since the African swine fever outbreak in 2019 as soaring feed costs and low meat prices led to slower soybean crush levels. Meanwhile, we also expect India (refer to Figure 6) to reduce its vegetable oil imports in the near-term given that its edible oil stock position is at the highest level since May 2019.
- Expecting a strong production recovery in 2H. We expect to see an upward pressure for global vegetable oil supplies in the second half on rising palm oil production. Given the favourable weather pattern in the last 6 months, we expect to see bumper harvesting if the foreign workers are allowed to return to Malaysia ahead of the peak production period in Oct.
- A new base for the CPO prices. The 10-year average for the CPO price is RM2,850/mt, which is far from the current level of RM6,400/mt. Due to the massive jump in agricultural related expenses (wages, fertilizer and pesticide), we believe CPO prices are heading to a higher base, led by cost-pushed inflation factor as breakeven level for the CPO price will inch higher going forward. Based on our analysis, RM1,800/mt was the near breakeven level in the past. Given the rising costs, RM2,200/mt-2,400/mt would be the new breakeven level in the future. This would also indirectly push up the long-term average to around RM3,000/mt, which is the psychological level for CPO prices.
- A correction for CPO price is imminent. The situation of the global vegetable oil crisis is likely to improve in the second half as production picks up while demand is likely going to be soft in the short-term. A potential upliftment of Indonesia’s palm oil ban should further ease the global vegetable tension. Edible oil prices, which have been soaring since Feb due to geopolitcal tensions and the recent ban on palm oil exports by Indonesia, could correct by up to 20% if there is no further setback. We think the CPO prices have peaked and we expect to see correction in the next 3 months.
- Raising 2022 CPO price forecasts. In view of the stronger-than-expected CPO price performance, we revise up our 2022 CPO price forecast from RM4,300/mt to RM5,000/mt but we maintain our 2023’s forecast of RM3,800/mt. We think CPO price will remain strong in the 1H of 2022. Thereafter, CPO prices could potentially fall to as low as RM4,000/mt towards year-end as we expect to see a pick-up in production when the foreign workers start returning to Malaysia amid high production season coupled with cooling demand from major vegetable oil consuming countries. The likelihood of lifting the Indonesia’s palm oil export ban will be negative news for the CPO price movements. At the point of writing, CPO futures traded at RM6,049/mt and it averaged at RM5,918/mt YTD.
In view of the potential downside risk, we cut our TPs across the plantation companies under our coverage by revising down our PER multiple based on -1 standard deviation. We also downgrade KLK (TP: RM26.62), TSH (TP: RM1.48) and Ta Ann (TP: RM5.16) as valuations look unattractive based on our new TPs.
Source: PublicInvest Research - 19 May 2022