During Palm Oil Trade Fair and Seminar (POTS Digital), we sense that most speakers had neutral-bullish undertone on palm oil price in 2021. We note that most speakers share the view that current bullish price sentiment will sustain in the near term, on the back of tight supply of major edible oils and low inventory levels among major edible oil consuming countries. While we share the speakers’ near-term bullish view on CPO price, we maintain our CPO price projection of RM2,700/tonne (for 2021-2022), as we believe current high CPO price will not sustain over the longer term. Hence, we reiterate our Neutral stance on the sector. Our top picks are Hap Seng Plantations (BUY: TP: RM2.17), IJM Plantations (BUY: RM2.17) and TSH Resources (BUY: RM1.38).

Neutral-bullish price undertone. During Palm Oil Trade Fair and Seminar (POTS Digital), we sensed that most speakers had a neutral-to-bullish undertone on palm oil price in 2021.

Datuk Dr. Kalyana Sundram (CEO of MPOC). Dr. Sundram is optimistic on CPO price in 2021, with a projected average CPO price range of RM3,217/tonne, as he expects stocks level to remain low (on the back of tight supply situation and positive demand potential). He projects CPO price to average at RM3,650/tonne in 1Q21, and price correction to only happen in 2H21.

Thomas Mielke (CEO of Oil World). Mr Mielke expects the recovery in palm oil production will result in a moderate setback in palm oil price in 2021, as he questioned if worldwide palm production could recover sufficiently to meet palm demand recovery (both on edible and biofuel requirements) due to labour constraints. On the other hand, he also highlighted several uncertainties to watch out for. These include, amongst others, (i) the possibility of Indonesian government reducing the biodiesel mandate temporarily (given the tight supply situation and high POGO spread currently), which will have a bearish impact on palm oil prices, if it happens, (ii) whether Covid-19 pandemic could be brought under control, (iii) China’s policies regarding imports and reserve stocks amidst high prices, and (iv) impact of current high prices on consumption (particularly in price-sensitive countries).

Togar Sitanggang (Vice Chairman of The Indonesian Palm Oil Association, GAPKI)... Despite having projected domestic consumption and export to outstrip palm oil supply growth of 3.5%, Mr Sittangang expects CPO price to be range bound between US$750-850/tonne in 2021, as high palm oil price is not supportive of the country’s biodiesel mandate

…on Indonesia’s biodiesel mandate. Despite the widening price gap between domestic fatty acid methyl ester (FAME) and gas oil, Mr Sittangang shared that Indonesia’s biodiesel fund is sufficient to fund the country’s biodiesel mandate (B30) at least until 1Q21, following the increase in export levy since Jan -21. While the government has plans to raise its blending target to B50 in the future, it may not increase its biodiesel blending mandate to B40 in 2021, depending on economic viability. He also shared that B40 blending is still in discussion stage (as the composition of B40 is yet to be finalised, depending on the availability of Hydrotreated Vegetable Oil from Pertamina) and due to Covid-19 pandemic.

Dorab Mistry (Director of Godrej International Ltd). Mr Mistry remains bullish on palm oil price in the near term (with high price volatility, particularly until Mar/Apr-21), given the tight supply situation (for both soybean and palm oil). He expects palm oil price to start trending down after May-21 (on the back of an anticipated recovery in palm oil production, expansion in US soybean plantings, and demand rationing arising from high prices).

Maintain NEUTRAL. While we share the speakers’ near-term bullish view on CPO price, we maintain our CPO price projection of RM2,700/tonne (for 2021-2022), as we believe current high CPO price will not sustain over the longer term. Hence, we reiterate our Neutral stance on the sector. Among the plantation stocks under our coverage, small-to-mid cap plantation players will likely outperform the big cap players, due to their emphasis on upstream plantation segment (which tends to performs better vis-à-vis the integrated players amidst rising CPO prices). Our top picks are Hap Seng Plantations (BUY: TP: RM2.17), IJM Plantations (BUY: RM2.17) and TSH Resources (BUY: RM1.38)

Source: Hong Leong Investment Bank Research - 8 Jan 2021