Most speakers shared their relatively bullish CPO price outlook during the two day virtual palm oil conference, with average CPO price forecast of above RM3,300/mt in 2021, as demand rationing arising from high prices and anticipation of an output recovery in 2H 2021 are mitigated by persisting low palm oil inventory level (albeit slowly improving in anticipation of a mild output recovery in 2H 2021) and biodiesel demand (particularly, in US and South America). We maintain our CPO price assumption of RM2,700/mt for 2021-22 for now, pending a further review on the sector (with upward bias). We maintain our NEUTRAL rating on the sector. For exposure, our top picks are Hap Seng Plantations (BUY; TP: RM2.17), IJM Plantations (BUY; TP: RM2.29) and TSH Resources (BUY; TP: RM1.35).

Positive price outlook in 2021. Most speakers shared their relatively bullish CPO price outlook during the two-day virtual palm oil conference, with average CPO price forecast of above RM3,300/mt in 2021 (see Figure #1). While most speakers believe that current high palm oil prices will not sustain over the longer term (i.e. beyond 1H 2021, on the back of demand rationing arising from high prices and anticipation of an output recovery in 2H 2021), these price bearish factors are somewhat mitigated by persisting low palm oil inventory level (albeit slowly improving in anticipation of a mild output recovery in 2H 2021) and biodiesel demand (particularly, in US and South America).

Palm production recovery in 2021 may not be significant. All speakers shared that palm oil production recovery will likely be insignificant in 2021, mainly on the back of labour shortage in Malaysia.

Biodiesel: lower discretionary demand for biodiesel will be mitigated by increases in biodiesel mandates. Over the near term, lower discretionary demand for biodiesel (as a result of unfavourable POGO spread) will be mitigated by the increases in biodiesel mandate in Malaysia (which has been increased from B10 to B20 in Sarawak since Sep-20, and is expected to increase to B20 in Sabah by Jun-21 and Peninsular Malaysia by Dec-21) and Indonesia (which will likely be increased from B20 currently to B40 by 2021, as biodiesel funding grows following the revision in export taxes). Over the longer term (beyond 2023), higher biodiesel mandates in Malaysia and Indonesia will be partly be offset by declining biodiesel exports to EU region (particularly from 2024 onwards), as palm-based biodiesel as classified as high Indirect Land Land Usage Change (ILUC) risk fuel, which will be gradually phased out.

Key factors to watch in 2021. These include (i) US planting intentions (which will be released on 31 Mar 2021), (ii) weather development in major soybean producing countries, and (iii) fund flow in commodity market (as current bullish price sentiment is partly driven by the abundance of liquidity).

Forecast. We note that our in-house CPO price assumption of RM2,700/tonne for 2021-2022 is notably lower compared to the speakers’ forecasts, as our current CPO price projection (particularly for 2021) is based on the assumption that labour shortage in Malaysia will gradually ease from Mar-21 onwards (which now seems ambitious). We maintain our CPO price assumption of RM2,700/mt for 2021-22 for now, pending a further review on the sector (with upward bias).

Maintain Neutral. We maintain our NEUTRAL rating on the sector. For exposure, our top picks are Hap Seng Plantations (BUY; TP: RM2.17), IJM Plantations (BUY; TP: RM2.29) and TSH Resources (BUY; TP: RM1.35).

Source: Hong Leong Investment Bank Research - 25 Mar 2021