Review of March 2022 figures:

March is typically the month when declining MoM fruit output starts to turn around and register MoM improvements until Sept or Oct of the same calendar year. This trend appears to be holding for CY22 as March FFB output improved over February month to reach 1.411m MT (+24% MoM, -1% YoY). However, closing inventory of 1.473 MT (-3% MoM, +2% YoY) was lower MoM as exports and domestic usage ended up higher than expected. March’s exports of 1.265m MT (+15% MoM, +6% YoY) was stronger than anticipated. China and EU bought more MoM as well YoY. Top buyer, India, also imported more palm oil MoM though lower than a year ago. All in all, despite high CPO prices in March, demand proved less elastic due probably to (a) preparation for Hari Raya which falls in early May) (b) disappointing South American soyabean oil (SBO) output and (c) the disruption to sunflower oil after the Russia-Ukraine conflict erupted. For March 2022, MPOB reported unprecedented average CPO price of RM6,867 per MT (+16% MoM, +70% YoY).

Moving forward, we expect CPO prices to consolidate a little as fruit production picks up further MoM. However, we believe the downside to palm product prices should be limited due to the overall, rather stretched supply of edible oils and fats globally. The current stretched supply already assumes 3-4% higher palm oil supply YoY for CY22. If this disappoints due, perhaps, to continuing labour shortfall in Malaysia or poor weather in Indonesia, supply may be constrained well into CY23.

a) End March, palm oil inventory improved MoM but overall supply situation is still stretched. Output should continue to improve in coming months and while palm oil is the most used vegetable oil, it only commands 35-36% of the overall market. This meant, supplies of other alternatives such as rapeseed and sunflower oils are still important consideration and their supplies are not likely to improve until late CY22, possibly into 2023.

b) South American SBO (the no.2 oil after palm oil) was supposed to ease supply tightness about now but poor harvest meant no SBO supply uptrend till 4Q of CY22 when North American (US) soyabean harvest is crushed into feed meals and SBO.

c) The Russia - Ukraine conflict also pushed up energy prices which is supportive of biofuels demand. So far high edible oil prices seem to have kept biofuel demand in checked but as long as crude oil prices are elevated, any significant easing in edible oil prices will sooner or later encourage conversion into biofuels.

d) High energy prices is also causing nitrogen-based fertiliser prices to surge as the production process is energy intensive. Major exporters of nitrogen fertilisers are thus located in Middles East, Asia but also Russia with Russia and China often ranking as the leading or second largest exporter between them. Hence the Russia-Ukraine conflict and economic sanctions on Russia is disrupting global fertiliser supply.

Our projection for April:

For April, we are expecting CPO output to continue improving MoM to reach 1.454m MT (+3% MoM) but will not rule out the risk of ongoing labour shortages impeding production. At this juncture, new batches of guest workers are due to arrive from May or June onwards.

With April supply due to improve further, exports should trend up accordingly as we price to ease somewhat (but still elevated). Demand is expected to come from (a) Europe as its main source of sunflower oil from Ukraine has been disrupted (b) festive buying from Muslim markets in South Asia, Middle East and Africa ahead of the Hari Raya Aidilfitri due in early May as well as (c) India and China following the poorer than expected soyabean harvest in South America.

As palm oil supply starts picking up seasonally, downward pressure on prices is set to weight in over the coming months. Nonetheless, we expect any downside to palm oil prices to be well supported by (a) overall supply tightness in the global edible oils and fats landscape (b) palm oil and soyabean oil (SBO) production is expected to improve but only in 3Q / 4Q (c) this expected improvement from palm oil and SBO are more likely help prevent supply situation from tightening further rather than lifting global oils and fats supply significantly and lastly (d) firm hydrocarbon oil prices will encourage biodiesel usage if vegetable oil price does weaken sufficiently.

On balance, despite some downward pricing pressure for palm oil, we expect palm oil prices to stay firm for CY22 with the likelihood of extending into 2023 as well. Our current CPO price assumptions for CY22-23 remain RM4,000 and RM3,500 per MT but we are prepared to upgrade to RM4,500 for CY22 and RM4,000 for CY23 if need be.

We prefer to stay selective on the sector in light of easing CPO prices and some ESG overhang, hence stay NEUTRAL on the sector but we like KLK (OP, TP: RM30.00) which expanded significantly recently so expected strong FY22 YoY growth. We also like high dividend yielding group such as HSPLANT (OP, TP RM2.65) and recently upgraded TSH (OP, TP: RM2.08) on strong operating cashflow coupled with assets disposals to help de-gear and restart more aggressive plant up of another 20K-30K Ha in Indonesia to almost double existing area over the next 5-10 years.

Source: Kenanga Research - 12 Apr 2022