We see better prospects in 2H18 and maintain our average CPO price assumption of RM2,500 for 2018, supported by (i) weaker MYR, which is supportive of palm oil prices, (ii) Indian government’s recent move to raise import duties on other soft oils, which will boost India’s demand for palm oil in coming months, and (iii) potential re-emergence of El Nino, which will lend support to palm oil prices. We maintain our average CPO price assumption of RM2,500/tonne for 2018 and 2019, and Neutral stance on the sector.

A weak 1H. CPO spot price averaged at RM2,420/tonne in 1H18, 17.6% lower than 1H17 due to several factors. The factors include (i) increasing palm oil supplies arising from more planted areas graduating to mature and/or higher yielding brackets (in particularly, Indonesia) and absence of weather driven supply disruption, and (ii) heightened concerns on trade war arising from trade spat between China and US.

Moving into 2H – expect slightly better outlook. Despite the weak prices in 1H, we see better prospects in 2H (vs. 1H) and maintain our average CPO price assumption of RM2,500 for 2018, supported by (i) weaker MYR, which is supportive of palm oil prices, (ii) Indian government’s recent move to raise import duties on other soft oils, which has in turn narrowed the duty gap between palm oil and other soft oils, and (iii) potential re-emergence of El Nino.

Weaker MYR is supportive of palm oil prices. HLIB’s economic research expects MYR to weaken in 2H18 (vs. 1H18), as it expects uncertainties on global trade policy and divergent monetary policy actions (arising from lower-than-expected economic growth in other advanced economies) has led to currency depreciation pressures in some emerging economies including Malaysia. A weak MYR (against the USD) augurs well for palm oil prices, as it strengthens the price competitiveness of palm oil against other competing oils (in particularly, soybean oil, the major competing oil to palm oil, which are denominated in USD).

Palm’s price competitiveness improved on narrowed duty gap between palm oil and other soft oils. Indian government’s recent move to raise import duties on crude and refined soft edible oils (which include soy oil, sunflower oil and rapeseed) has narrowed the duty gap between palm and other soft edible oils (see Figure #3), hence boosting India’s demand for palm oil in coming months.

Potential return of El Nino to support palm oil prices. According to Australia’s Bureau of Meteorology, the warming of the Pacific Ocean (since Apr-18) has led to a 50% chance of an El Nino event developing later this year. An El Nino episode (if it happens) will have a lagged impact on palm oil production, hence lending support on palm oil prices.

Forecast. We maintain our average CPO price assumption of RM2,500/tonne for 2018 and 2019.

Rating. We maintain our NEUTRAL stance on the sector. While we expect CPO prices to trend higher in 2H, we still see challenges in the sector over the longer term, which include, amongst others, potential minimum wage hike (which will affect Malaysian planters’ cost of production, hence earnings).

Source: Hong Leong Investment Bank Research - 5 Jul 2018