PETALING JAYA: The plunge in crude palm oil (CPO) prices due to fears over China’s demand for palm-oil products attributable to the coronavirus is expected to be temporary, analysts say.
In a note by Affin Hwang Capital Research, it said CPO prices would potentially recover due to the expectation of supply tightness in vegetable oils, especially for the first half of the year.
“The anticipation of tight supply-demand dynamics and lower stock/usage ratios of eight vegetable oils, including palm oil, has positively helped prices since mid-October 2019. CPO prices have remained above RM2,900/MT for most of January 2020; however, on Jan 28, the CPO price plunged to RM2,736/MT.
“Overall, we maintain our CPO average selling price assumptions at RM2,500/MT-2,600/MT for 2020-21,” it said.
PublicInvest Research said given tightening inventory levels, it believes there is a minimal impact on CPO prices.
“The offloading of the agricultural goods from vessels is running behind schedule due to transport restrictions and shortage of workers. More than a dozen provinces announced an extension of the Lunar New Year holiday until this week as the nation attempts to halt the spread of the virus.
“With the mounting concerns over coronavirus spread, we believe the exports volume to China in February is likely to slow down,” it said.
PublicInvest has a full-year CPO price assumption of RM2,600/MT as it thinks CPO prices are likely to average around RM2,800/MT in the first half before easing to RM2,400/MT.
In terms of production, CPO production in January dropped for the fourth consecutive month to 1.17 million MT, down 12.6% month-on-month (m-o-m) and 32.9% year-on-year (yoy), partly attributable to the monsoon season and Chinese New Year holiday break.
CPO production declined throughout the country, down by 11.8%, 14.9% and 11.5% m-o-m to 560,800 MT, 316,900 MT and 288,100 MT in Peninsular Malaysia, Sabah and Sarawak, respectively.
“We expect production to pick up again towards Q2 as the monsoon season ends. For 2020, we expect Malaysia’s CPO production to be 1-2% lower yoy, due to the lagged effect of the dry weather in 2019, lagged effect of lower fertiliser application and minimal new plantings of oil palm,” Affin Hwang said.
As such, exports in January declined by 13.2% m-o-m and 27.8% yoy to 1.21 million MT, attributable to key buyers India and China buying less of Malaysian products.
On the other hand, palm oil exports to Pakistan soared 88% m-o-m while EU and US markets rose 26% and 67%, respectively.
“We expect the lower demand for palm-oil product from the trade spat with India and the coronavirus in China to only be a temporary setback,” said Affin Hwang.
Overall, Affin Hwang is maintaining its overweight call on the plantation sector, with buy ratings on Ta Ann Holdings Bhd, IJM Plantations Bhd, Hap Seng Plantations Holdings Bhd, KL Kepong Bhd and Jaya Tiasa Holdings Bhd.
PublicInvest is also maintaining an overweight call for the sector, with its top picks being Ta Ann, Sarawak Plantation Bhd and TSH Resources Bhd.
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