• At the 35th Palm & Lauric Oils Price Outlook Conference & Exhibition (POC2024), which was held at Shangri-La Hotel Kuala Lumpur on 5-6 March 2024, speakers offered mixed views on palm oil prices going forward. However, the general consensus is that palm oil prices will be higher in the near term before moderating in 2H24 which is in-line with our stance.

• Barring any unexpected events, we expect the CPO price to trade within a range of RM400/MT above or below RM3,800/MT for the rest of the year.

• We maintain a NEUTRAL call on the plantation sector, considering the expected risk of challenging earnings due to lower-than-expected palm product prices, muted demand, and lower-than-expected production. Additionally, we maintain the 2024 CPO average selling price (ASP) of RM3,600/MT.

The 35th Palm & Lauric Oils Price Outlook Conference & Exhibition (POC2024), which we attended on 5th and 6th March 2024, featured presentations from several prominent speakers. They shared their perspectives on the outlook and potential challenges in the plantation sector for 2024, along with discussions on the supply and demand of major edible oils. A diverse range of projections for CPO prices was presented by the speakers, spanning from RM3,800 to RM4,700 per tonne. The following are some of the notable highlights from the event.

Oleochemicals & Laurics Industry Outlook

Mr. Nikhil Vallabhan (Director of the Chemicals, Materials & Foods Practice at Frost & Sullivan), presented that despite encountering numerous challenges, he maintains the expectation for modest growth in oleochemicals demand. For the period of 2023 to 2028, the Volume Compound Annual Growth Rate (CAGR) is expected to be 3.5- 4%, with a higher Value CAGR of 5-5.5% (chart 1). The primary source of growth is anticipated to originate from the Asia-Pacific region, which is still in the "emergence and growth" phase, while Europe and North America, being in mature economic phases, are expected to experience moderated growth. Regarding the dominant types of oleochemicals, he foresees fatty acids remaining the largest product sector, with the highest growth expected in the fatty acids methyl ester (FAME, or biodiesel) sector.

The key challenges facing the oleochemical sector include: i) the instability in feedstock prices causing fluctuations in product pricing, such as the fluctuating prices of CPO; ii) regulatory shifts, exemplified by the EUDR, which require companies to ensure products sold in the EU have not contributed to deforestation and forest degradation, posing tracking challenges along the supply chain; iii) the challenge posed by petrochemical competition, notably in North America, historically a major market for synthetic alcohols, with significant investments in shale-based ethylene derivatives dampening oleochemical industry growth; and iv) the imperative of ensuring sustainability throughout the value chain, particularly contentious between the Asia-Pacific and EU regions.

Dr Julian Conway McGill (Managing Director of Glenauk Economics) however, tendered a more bullish outlook for lauric oils. He believes that due to drought in the Philippines which is expected to impact the country’ coconut oil exports, especially in 2H24 and together with lower increase in global palm kernel oil (PKO) output, higher prices are expected come 3Q24. According to Dr. Julian and notwithstanding possible disruptions to prices which might arise from the EUDR, PKO price in Rotterdam are expected to top USD1,300/tonne (MYR6,084/tonne) which is higher than current PKO price of MYR4,400/tonne. As for coconut oil price, he expects it to exceed USD1,400/tonne (MYR6,552/tonne).

Palm & Major Oils Industry Outlook

Speakers' opinions under this segment are mixed with some expressing caution while others are bullish. Among those who held a measured stance is Dr. Sathia Varqa, (Senior Analyst, Fastmarkets Palm Oil Analytics). He believes that the peak of RM4,000/tonne in CPO price witnessed in 1Q24 was due to concerns regarding availability of supply on account of lower production and inventory issues. Going forward, he opines that CPO prices will trend lower beginning 2Q24 as pressure on prices mounts with anticipated high phase in oil palm output from March onwards. Malaysia’s CPO production in 2024 is expected to increase slightly by 1-2% to circa 18.75-18.95mn tonnes (from 18.55mn in 2023), while Indonesia’s production is forecasted to remain flat at 48 – 48.5mn tonnes. Dr. Sathia also added that high stockpiles in China and India would also likely dampen demand, thereby impacting CPO prices. However, he does not specify the average price for 2024.

Another speaker with a measured view is Mr. Rasheed JanMohammed (Chief Executive of Westbury Group). During his presentation, he highlighted the significance of demand from the Indian subcontinent, a major market for palm oil products. Pakistan, for instance, imported approximately 10-11% of its total palm oil products from Malaysia between 2021 and 2023. However, grappling with high inflation and interest rates, the volatility in edible oil prices has placed considerable strain on the country, potentially impacting its imports of palm oil products. In the case of India, Mr. Rasheed anticipates a decline in imports of edible oils to 15-15.5mn tonnes in 2024, compared to 15.84mn tonnes in 2023, reflecting reduced demand. He projects CPO prices to range between RM3,800 and RM4,100 per tonne, with the possibility of reaching RM4,200 in March/April 2024. However, going forward, he foresees stiffer competition from other edible oils, particularly soybean oil, and moderate demand, which may impede further upward progression in CPO prices.

Soybean production in the US and Brazil is expected to decrease slightly to 113mn and 154- 156mn tonnes, respectively, in 2024 from 116.3mn and 158mn tonnes in 2023. However, when combined with Argentina's anticipated production normalization of 50-52mn tonnes for 2024, overall production remains substantial. This could result in the narrowing of the price discount gap between CPO and other oils, especially soybean oil, thus making the latter more attractive to buyers.

Mr Nagaraj Meda (Founder, Chairman & Managing Director of TransGraph Consulting Pvt Ltd) has a more reserved perception on CPO prices. He anticipates CPO futures to be below RM4,000-RM4,050/tonne and decline further to RM3,200 in the next 3 to 4 months, prior to any major developments for the remainder of the year. His view are based on several factors: i) industrial consumption comprising Biodiesel and Oleochemicals is expected to remain stable (Malaysia: 3.3mn tonnes and Indonesia: 17.8mn tonnes), ii) a change in weather climate from El Nino to to ENSO-neutral is likely to occur by April-June 2024 (79% chance), with an increasing probability of La Nina developing in June-August 2024 (55% chance), is anticipated to be favorable for global agriculture production, iii) total palm oil production for Malaysia and Indonesia to increase by 1.4% and 1.2% respectively, reaching to 70.2mn tonnes, and iv) there is a high global soybean ending stock of approximately 110mn tonnes.

Meanwhile, on a more optimistic side for price outlook, Mr Thomas Mielke (Executive Director, ISTA Mielke GmbH - Oil World), opines that CPO futures over the next 3 months would trade in the range of RM3,800-RM4,300/ tonne. As for refined, bleached & deodorised (RBD) palm olein for April-September 2024, he projected this to be at USD920/tonne (around MYR4,350/tonne). Some of the key points highlighted as below:

i). Palm oil's growth dynamics have undergone a significant shift, characterized by a notable slowdown in area expansion and inadequate re-plantings, thereby maintaining yields below their potential levels. This trend suggests an anticipated slowdown in annual growth, expected to reach only 1.5mn tonnes or less over the upcoming decade, a notable decline compared to the average annual growth of 2.9mn tonnes observed in the preceding decade.

ii). Despite existing demand uncertainties, there are promising growth prospects worldwide, particularly within the energy sector. Currently, 20% of the total world consumption of the 17 oils & fats is absorbed by the energy sector. Although a slowdown in demand growth for biodiesel and hydrogenated vegetable oils may occur, there is emerging demand for Sustainable Aviation Fuel (SAF). However, insufficient growth in world supplies of SAF feedstocks like Used Cooking Oil (UCO), tallow, and other non-food feedstock may sustain a high dependence on palm oil, soybean oil, and rapeseed oil as feedstock for biofuel production.

iii). A prospective global production deficit from January to September 2024 is anticipated to bolster vegetable oil prices. The growth in world production of eight vegetable oils is projected to decelerate to 3.9mn tonnes in the period spanning October 2023 to September 2024, a significant decrease from the previous season's increase of 9.3mn tonnes.

iv). This projected global production deficit is likely to lead to an appreciation in vegetable oil prices. The growth in world production of sunflower and rapeseed oils is estimated to decelerate from a combined 5.7mn tonnes in 2022/23 to only 1.9mn tonnes in 2023/24, resulting in a reduced ability to contribute to rising world consumption. Consequently, there is a much larger dependence on soybean oil in 2023/24 (+1.7mn tonnes in 2024), indicating an expected strengthening of sunflower, rapeseed, and soybean oil prices in the near term, thereby reversing the current premiums of palm oil over sunflower oil and soybean oil.

Dr. Mohamad Fadhil Hassan (Head of the Foreign Affairs Division at the Indonesian Palm Oil Association GAPKI), is bullish and confident that CPO prices will rise in the near term due to seasonal factors, followed by a downward trend in the 2H2024, provided that there is no change to the biodiesel blending policy. He estimates the CPO price range for 2024 to be USD900-USD1,000/tonne (or MYR4,200-MYR4,700/tonne), suggesting that the average price of CPO this year will be higher than in 2023. The projection is based on several factors: i) Indonesia’s ongoing economic growth will drive domestic consumption, ii) its significant and expanding population, iii) the introduction of new acreage into harvest, potentially leading to a 2.2% increase in palm oil production to approximately 54.4mn tonnes in 2024, and iv) the mandatory biofuel blending policy, with the possibility of it being increased to B40 from B35 in the second half of 2024. Dr. Mohamad believes that Indonesia’s domestic consumption, based on the B35 mandate, will grow by 8.5% to 24.1mn tonnes in 2024. However, exports of palm oil products are expected to decline by 2.8% to 29.5mn tonnes.
 

The bullish sentiment on CPO prices in 2024, is also shared by Mr Dorab Mistry, OBE (Director of Godrej International Limited). He is optimistic on palm oil and predicts that the 3-months futures for CPO price to trade at between RM3,900-RM4,500/tonne until June, due to tight supplies. He added that the trend in palm prices for the rest of the year will depend on production and impact of weather conditions in North America. On supply side, he expects lower supply from Indonesia by at least 1mn tonne in 2024, while Malaysia’s production to remain flat. Global vegetable oil supply is projected to moderately increase by 3.1mn tonnes in 2024, mainly driven by soybean and rapeseed oil. Nonetheless, he expects soybean oil futures to rebound due to the seasonal reduction in US soybean production. Other factors influencing CPO prices include China's economic outlook, US interest rates together with movements in the USD currency, changes in biofuel blending mandates as well as incentives offered, and fluctuations in crude oil prices.

Speakers’ Consensus on CPO Price Trend is Mostly In line with Our View

A notable takeaway from the POC2024 event is the general consensus among speakers that palm oil prices will rise in the near term before moderating in the second half of 2024, which aligns with our stance. Views expressed at the conference varied, with some speakers refraining from providing a specific price range and average palm oil price, while others offered either measured or bullish estimations. Compared to those presented by the speakers, our perspective is measured, taking into account relevant factors mentioned below.

Maintain CPO price range near RM3,800/MT, to trade within a range of RM400/MT above or below for the rest of the year. In the midst of industry-wide challenges, including escalating operational costs and consistently low yields, plantation companies are finding reassurance in the optimistic sentiment surrounding the current CPO price outlook, which is anticipated to offer sustained support for CPO prices. Assuming no other unexpected events, we expect the CPO price to remain within a range of RM400/MT above or below RM3,800/MT for the rest of the year. This expectation is supported by: 1) anticipated tightness in palm oil (PO) supply, coupled with the strength in other edible oil prices such as soybean oil (SBO), 2) prolonged geopolitical tensions, including developments in the Black Sea and the Red Sea conflict, and 3) potential increases in production costs that might surpass initial projections.

Earnings Outlook: Prone to significant impact from shifts in production, cost factors, and fluctuations in CPO prices. We maintain a "cautiously constructive" outlook on plantation companies, while remaining vigilant about external challenges, especially during periods of lower productivity for palm oil. In our view, to sustain profitability, companies must efficiently manage operational costs and capitalize on improvements in FFB yield, given the current volatility in palm product prices. As such, it is worth considering plantation companies with the potential for higher production growth this year, such as IOI, KLK, SIME Plant, HAPL, SOP, Sarawak Plant, and Genting Plant.

Maintain a NEUTRAL call on the plantation sector with a 2024 CPO average selling price of RM3,600/MT, considering the anticipated risk of challenging earnings due to lower-thanexpected palm product prices, muted demand, and ongoing lower-than-expected production, which are expected to persist and pose challenges for plantation companies' prospects. We have a BUY call on IOI (TP: RM4.50) and SELL call on FGV (TP: RM1.23).
 

Source: BIMB Securities Research - 12 Mar 2024