In a report dated 9 Sept, Macquarie Equities Research (MQ Research) revised its estimates on crude palm oil (CPO) price upward to RM2,550 and RM2,600 for CY20E and CY21E, while reducing the long term price to RM2,500. MQ Research is positive that CPO price will remain higher and that China will purchase more CPO than normal in 2H20 if there is a soybean supply shortage in India.

Event

• MQ Research revises its CY20-21E and long-term CPO price/mt assumptions to RM2,550, RM2,600 and RM2,500 from RM2,200, RM2,450 and RM2,630, respectively. MQ Research initially believed that demand would only recover in 4QCY20, but strong exports data from Indonesia and Malaysia starting from the May data releases have proven otherwise. MQ Research forecasts the global CPO stock-to-usage (S/U) ratio to tighten to 15.3% in CY21E from 17% in CY20E, before loosening to 16.1% in CY22E as supply and demand reach normalcy.

Impact

• Lack of fertilising and bad weather – productions to remain weak up to 1H21-end. MQ Research forecasts supply to continue to be weak due to a lack of fertiliser application in CY18-19 and floods in Indonesia. MQ Research estimates CY20E CPO supply to drop by 4.7% YoY and to see a recovery in 2H21E with supply increasing by 3% YoY vs. CY20E. MQ Research expects supply to return to pre-COVID-19 levels in CY22E onwards, hence a weaker long term CPO price forecast.

• 2H20 global demand to be stronger as India may need more CPO than they usually do. Global demand, in MQ Research’s view, has returned to normalcy based on monthly data. India and China are back in the market to purchase CPO. In Malaysia, China tends to buy c.60% more CPO in 2H vs. 1H, meanwhile India tends to buy c.20% less in 2H vs. 1H. However, MQ Research understands the floods in India, which are affecting groundnut and soybean crops, coupled with the pent-up CPO demand from 1H20, will push for more CPO purchase out of India in 2H20. MQ Research believes China will purchase more CPO than normal in 2H20, if the supply shortage in soybeans happens.

• Labour shortage during COVID-19 is the central issue among planters in Malaysia. Due to the restricted border crossing during this pandemic, Malaysia is facing labour shortages. MQ Research expects plantations will be the most affected sector in Malaysia. MQ Research understands that planters are now having to pay workers more incentives to keep them employed. MQ Research estimates the wage impact to be around 1-2% of profit after tax (PAT). The labour shortage among big players is in the range of around 8-10%, while the smaller players are around 4-5% short of the labour capacity they had pre-COVID-19. Genting Plantations had mechanised the fruit plucking reducing the need for human labour by 50%.

Outlook

MQ Research’s top picks in the ASEAN Plantations coverage are Sime Darby Plantations (Sime Plant) and London Sumatra (LSIP) – both are the beneficiary of a CPO price upswing and have a high correlation between the CPO price and their respective share prices.

Source: Macquarie Research - 10 Sept 2020