With the release of the September 2020 Malaysia Palm Oil Board (MPOB) stats, Macquarie Equities Research (MQ Research) stated in its report (19 Oct) that it remains positive on the near-term outlook of crude palm oil (CPO), and believes purchase momentum from China and India in 4Q20 should support the CPO price.

Event

• Following the release of September 2020 MPOB stats, MQ Research remains positive on the near-term outlook of CPO. MQ Research believes demand from China and India will be amplified in 4Q20 due to the upcoming festive seasons (Nov-Feb) starting with Diwali, Christmas, New Year and Chinese New Year. While demand remains on an uptrend, Malaysia’s production is still lagging with 9M20 production coming at 4% lower than that of 9M19. If the production recovery is not as swift, we are likely to see the MPOB stock-to-usage ratio remain tight at 8.5% or lower, thus supportive of the CPO price.

Impact

• Spikes happen when CPO prices go beyond RM3,000/mt. MQ Research previously highlighted that when MPOB stocks-to-use (S/U) ratio trends below 8.5% for more than 3 months, the CPO price tends to trade closer to RM3,000/mt. What was apparent since the demand recovery in May 2020 was that the CPO price had recovered while the share prices of plantation companies remain as laggards. MQ Research tracks the CPO price vs share price movements of the top 4 plantation companies in Malaysia and observe that share prices spiked up when the CPO price went beyond RM3,000. Given strong demand vs the weak production recovery backdrop above, MQ Research believes the CPO price will break the RM3,000/mt level in 4Q20 and drive plantation share prices higher.
• Laggard share price movement vs the CPO price is due to less participation by active foreign funds. Since the environmental, social and governance (ESG) concerns were raised on plantation companies, more so after the 2019 Southeast Asian Haze incident, there are less active foreign funds investing in the plantation companies; those remain are mostly passive funds. While local funds hold substantial positions in plantation companies, MQ Research believes higher CPO prices and profits will support a rotation into the sector. Similar outcome was seen in Indonesian planters as foreign shareholdings declined sharply in CY20. (i.e. London Sumatra Indonesia (LSIP IJ) saw over US$28m outflow over the last 5 years, with US$6m YTD).
• La Niña will likely turn Brazil into a net importer of soybeans – supportive of CPO prices. The La Niña in South America has seen soybean producing countries like Brazil and Argentina impacted severely by the dry weather. With soil moisture supplies at super low, Brazil will likely turn into a net importer of soybeans by year end. Upward pressure on the soybean oil (SBO) price throughout Nov-Jan would provide support to the CPO price. 

Outlook

• MQ Research’s sector top picks are Sime Darby Plantations and London Sumatra due to their high CPO price leverage.

Source: Macquarie Research - 20 Oct 2020