• Maintain sector NEUTRAL, new Top Picks: Johor Plantations Group (JPG), Sarawak Oil Palms (SOP), SD Guthrie (SDG) and PP London Sumatra Indonesia (LSIP). CPO prices may continue to ride on the current crude oil price spike, while all eyes are on weather uncertainties – which may result in prices staying higher for longer. However, demand rationing may take place in the short term, as CPO prices now look unattractive vs that of other oils.

• CPO is trading at a higher MYR4,200-4,300/tonne, led by the spike in crude oil prices on geopolitical risks (+19% over the last month) and happened despite the USD weakening (vs a normally inverse relationship). The palm oilgas oil (POGO) correlation has now risen to 0.52 (from -0.10 in Jan-Aug 2024). Assuming geopolitical risks continue and crude oil prices are still trending upwards, CPO prices may follow suit. Our 2024 price assumption of MYR3,900/tonne is unchanged for now, given the unpredictable situation.

• Other catalysts remain weather uncertainties and increasing biofuel mandates. The latest US National Oceanic and Atmospheric Administration forecast for La Nina shows a higher probability of 83% in Nov 2024-Jan 2025 vs 74% last month. Should La Nina eventuate and oilseed crops in the northern hemisphere be affected, we could see other vegetable oil prices rise – as such, palm oil prices may increase, too. On biodiesel, Indonesia’s 2025 target for B40 could raise its CPO usage by 16% YoY, to 13.9m tonnes. It could take some time for Indonesia to fully comply with the B40 mandate however, and we expect full implementation to only take place earliest in mid-2025, based on the time it took for it to implement B35 previously

• However, in the short term, demand rationing may occur. We may see a pause in restocking activities despite the upcoming festive period, as CPO is currently trading at a USD39/tonne premium to soybean oil and a slight USD21/tonne discount to sunflower oil, making it unattractive to buyers.

• This was already seen in September, when exports were flat (c.+1% MoM) despite the upcoming Deepavali festival – likely due to importers switching to other oils. This led to inventory levels rising 7% to 2.01m tonnes in September, ie earlier than expected. With exports likely to weaken in the coming months, we expect stock levels to continue climbing well past the 2mtonne mark, bringing stock-to-usage ratios to above the historical average.

• Short-term price rally should benefit purer planters. Despite supply being in peak season and demand being dragged by uncompetitive CPO prices, CPO prices may remain high for the time being, and move with the momentum of crude oil prices, as seen in previous instances of geopolitical tensions. Should La Nina emerge, prices may stay higher for longer – resulting in CPO remaining at a price premium and demand coming back as stocks dwindle. A short-term CPO price rally should translate to some rerating in the sector, with purer planters likely to benefit more vs integrated players.

• NEUTRAL. The recent weakening of the USD would be slightly negative for exporters (players with downstream facilities), but slightly positive for planters who sell entirely domestically (purer planters). Our Top Picks are now JPG, SOP, SDG and LSIP.

Source: RHB Securities Research - 11 Oct 2024