Swinging to La Nina event. La Nina conditions are expected to return later this year, following the end of the 2023/24 El Nino event. The most recent La Lina event spanned from 2020 to early-2023, marking a significant “triple dip” occurrence, meaning it persisted for three consecutive years. The World Meteorological Organisation has indicated a 60% chance of La Nina developing during the July-September 2024 period, with the probability increasing to 70% during August-November. This shift back to La Nina will result in cooling of the ocean surface temperatures in the central and eastern Pacific, influencing global weather patterns. The implication of La Nina typically sees increased rainfall in Southeast Asia, Australia and parts of South America, while regions such as the southwestern of US and central Pacific islands may experience drier conditions. On the ground, the occurrence of excessive rainfall may affect harvesting and transportation activities at the palm oil estates.

RSPO certification more crucial. The European Union (EU), which is currently Malaysia’s biggest palm oil importer with a market share of 25%, has rolled out the European Union Deforestation Regulation (EUDR) with effect from 30th December 2024. The new regulation will require companies importing products made from wood, cattle, cocoa, coffee, palm oil and soy to obtain a “due diligence” statement that confirms the goods were not derived from deforested lands or links to forest degradation. Local refiners who want to export to the EU will only source for Roundtable on Sustainable Palm Oil (RSPO)-certified CPO. Due to the hefty processing costs involved, the adoption of RSPO certification in Malaysia is still low. This could have a severe impact on the local plantation players as they might need to compete for refiners who have accessibility to other markets. In our view, the base case scenario is there will be a delay in the implementation of EUDR policy following major pushback from ministers and trade organisation within Europe and it could potentially result in inflation hike due to supply shortage of commodity imports.

Palm oil production has been picking up. Malaysia’s production has been on the uptrend in the past 3 months and is poised to see a stronger growth in the 2H as oil palm trees enter high production cycle amid favourable weather. We estimate average production growth of 20% in the 2H compared to 1H. On the other hand, we expect lacklustre production growth from Indonesia.

Stiffer competition from rivals. Apart from facing stiff competition from Indonesian counterparts due the favourable CPO export tax policy, palm oil has also been competing with cheaper soybean oil on tepid demand from renewable diesel producers as the commodity faces competition from US imports of used cooking oil. US biofuel producers have been favouring cheaper foreign supplies of vegetable oils. YTD, soybean oil futures retreated 6.8% to 44.18 cents per pound.

Projecting bumper global soybean harvest. The neutral weather leads to a bumper soybean crop in the US. Though La Nina may materialise in late 2024, it is unlikely to affect the current North American planting season. The USDA expects the country’s soybean production to rise 6.9% to 121.1m mt, just below the record high of 121.4m mt. The US agency’s assessment of soybeans in good or excellent condition stands at 72%, above the 10-year average soy rating of 68%. Overall, 2024/2025 global soybeans are projected to hit a record-high of 422.2m mt, up 6.6% YoY, which could potentially weigh on palm oil prices.

Seeing softer production cost. Cost of production is expected to be lower by 10%-20% in 2024 given the normalization of fertliser prices and higher FFB production yield. The key components of fertilisers are Muriate of Potash (NOP), compound, urea phosphate with NOP making up the bulk. NOP and compound prices have seen significant drops, down more than 50% since the peak. Despite the sharp correction, it is still 30% higher compared to pre-COVID levels, however. The key concern is the renewed surge in freight rates, which has spiked more than 233% YoY to USD5,115 per 40ft equivalent unit following the shipping disruptions in the Red Sea. It could delay fertiliser shipments by up to 15 days and increase the freight cost.

Downstream outlook remains challenging. Given the stiffer competition from Indonesian counterparts due to favorable CPO export tax coupled with weak demand from the oleo-chemical and biodiesel industries, the business environment for the downstream segment continues to be challenging. Some Malaysian refiners are currently running at losses or at low single-digit margins.

NEUTRAL. Despite higher production in 2H 2024, we expect CPO prices to remain in the range of RM3,800-4,000/mt on the back of tight supplies in Indonesia and low palm oil inventory in India and China. Our top pick is Ta Ann Holdings as we like its young age profile and efficient cost management.Figure 54: CPO Price Futur

Source: PublicInvest Research - 26 Jun 2024