CRUDE palm oil (CPO) prices have been kept at elevated levels this year, but the numerous uncertainties in the industry mean investors need to keep a close eye on palm oil stocks’ earnings for H2.

Year to date, CPO prices are up around 53 per cent. South-east Asian companies are likely to have a good run in H1 as the higher prices translate into better revenue and profit figures across the board.

A confluence of factors such as tight supply, bad weather conditions, the spike in crude oil prices, as well as geopolitical tensions, have kept prices at higher levels.

In H2, investors should brace for volatility in the commodity’s prices; and a correction could well be in the pipelines.

An RHB analyst said the earnings outlook for the sector will continue to be “buoyant” in H2 for as long as CPO prices stay strong, but warned that the commodity’s “price direction can turn at any point” due to uncertainties.

“These include the outcome of the Russia-Ukraine war as well as any potential changes made to biodiesel mandates globally,” he said.

The key headwinds for the sector include demand rationing activities that have surfaced on the back of high prices, which could in turn affect sales volumes, rising costs in terms of fertiliser, logistics and labour; as well as ESG (environment, social and governance) issues that are weighing on planters.

“Where (CPO prices) go in H2 2022 and 2023 remains to be seen, as this will largely depend on the outcome of the Russia-Ukraine war and its impact on oilseed supply as well as fertiliser availability,” said the analyst.

Crop output for 2023 will be affected if fertilisers are not available in H2 this year, which could prop up prices for longer. On the flip side, continued demand rationing or changes to Indonesia’s biodiesel mandate could cause price direction to reverse as supply improves.

Fitch Ratings analysts sounded similar concerns. They noted that CPO prices have averaged around US$1,450 per tonne this year, versus US$1,070 per tonne in 2021 and a 10-year average of US$700 per tonne.

Fitch is expecting a “gradual decline” in CPO prices due to higher output, although the analysts warned that the Russia-Ukraine war could keep prices elevated through 2023.

“Good weather and high CPO prices should encourage producers to raise yields in 2022,’’ said the analysts, noting that Indonesia’s industry body has estimated an increase in palm oil output of around 1 million tonnes after declines in 2020 and 2021.

As far as stock picks go, RHB prefers “purer Malaysian plays” who will benefit from current high prices. These players will also not be impacted by the “punishing tax structure” in Indonesia.

“We also like the players with Indonesian downstream capacities who will benefit from the current tax structure in Indonesia,” added the analyst.

In an Apr 20 note, UOB Kay Hian analysts said that it is highly possible that Wilmar International’s palm-related operations will contribute a large portion of the agribusiness company’s core net profit for Q1 2022.

The group’s upstream earnings will be boosted by strong CPO average selling prices, although sales volume for the quarter could fall on a year-on-year basis due to lower production and trade disruption from domestic market obligations in Indonesia in February and March.