• Our sector call is still Neutral despite CPO price may play catch-up and poise to trade in a range of RM2,700/MT – RM2,900/MT in 1H2020.
• Inventory level is expected to decline to 2.05m tonnes in 2020 although still substantially higher than 2016’s level of 1.67m tonnes.

• CPO production is forecast to drop slightly to 19.85m-19.95m tonnes in 2020 from 19.99m tonnes estimated for 2019.

• Demand is projected to remain supportive at 17.2m-17.65m tonnes in 2020 from 17.61m tonnes estimated for 2019.

• We raised our average CPO price forecast for 2020 to RM2,480/MT from RM2,380/MT previously due to improving demand/supply dynamics.

Sudden surge in CPO price – 2019 in retrospect

The price of CPO (local delivery) in the first nine-month of 2019 was traded lower ranging RM1,834/MT-RM2,195/MT, continuing a downtrend seen since Jan 2018. The ASP of PO was almost near the cost of production and planters are faced with compressing profit margins problem, hence, impacting their cash-flow and earnings.

Local spot CPO prices finally staged a breakout in October 2019, surging to a high of RM2,897 on 17 Dec. After breaking RM2,200/MT mark in 25 Oct to RM2,268/MT, within one week CPO prices had reached RM2,353.50/MT in Nov before consolidating about RM2,800/MT presently. The BMD 3-month CPO futures price at the time of writing stood at RM2,923/MT.

Taking cue from the improvement in CPO prices, plantation stocks are now rejoicing the CPO price uptrend as seen in their prices (refer Chart 1). The question to be asked is the sustainability of this trend and whether the increase in CPO price has already discounted by the market or is there any further room for higher share price. We foresee that the catalyst for current bullish CPO price hike is due to anticipated 1) lower FFB production from Malaysia and Indonesia next year, 2) rally in soybean oil (SBO) price – due to tighter supply of soybean and SBO, and 3) higher biodiesel take-off. As we remain positive on the improving demand/supply dynamics in the plantation sector, we have raised our average CPO forecast for 2020 to RM2,480/MT from RM2,380/MT previously.

Source: BIMB Securities Research - 30 Dec 2019