Poor weather, flooding to support Malaysia crude palm oil prices in near term: observers 

SHORT-TERM weather disruptions will likely support Malaysia’s crude palm oil (CPO) prices in the short term as supply takes a hit, observers have noted.

Speakers at UOB Kay Hian’s (UOBKH) palm oil event on Monday (Mar 6) said they expected CPO prices to be higher in the first half of 2023, as prolonged flooding in southern Peninsular Malaysia and East Kalimantan would lead to lower-than-expected production.

The high rainfall caused short-term disruptions to harvesting operations and the removal of fruits, as well as poorer fruit quality.

Moreover, demand for palm oil may not be as strong, as there have been no signs of strong demand from China. In India, high imports of sunflower oil may lead to slower palm oil imports, although consumption for edible oil rose.

UOBKH projected CPO average selling prices to be better in H2 2023 than in H1 2023, as production may come in lower than market expectations, due to weather disruptions in H2 2022 to Q1 2023.

“We also believe demand should be better as more inventory will be drawn down at destination countries,” UOBKH said.

In a separate report, CGS-CIMB said palm oil prices have been rising recently, because of concerns that heavy rains in Johor could affect production for March, thereby impacting supply.

A survey by its futures team found that Malaysia’s CPO output likely fell 9 per cent month on month in February, owing to seasonality and less working days. Malaysia’s palm oil exports, meanwhile, grew 1.2 per cent on month and 4.7 per cent on year to 1.15 million tonnes.

CGS-CIMB expects CPO prices to trade between RM3,800 and RM4,300 per tonne in March, while UOBKH projects between RM3,500 and RM4,000 per tonne for the first half of the year.

The former has reiterated its “neutral” call on Malaysia’s plantation plays, as it believes the sector lacks catalysts, although it is supported by a “decent” dividend yield of 3 per cent.

CGS-CIMB’s top picks are Hap Seng Plantations (HSP), Kuala Lumpur Kepong (KLK) and Ta Ann Holdings. The research team has “add” calls on both, with a target price of RM2.62 on HSP and RM22.87 on KLK. It noted that HSP offers enticing dividend yields of 7 per cent for FY2022 and 5 per cent for FY2023.

KLK’s upstream palm oil business earnings in Indonesia will benefit from the relaxation of export permits in Q4 2022. There are also potential synergies from the group’s recent acquisition of IJM Plantation.

UOBKH has maintained its “market weight” call on Malaysia’s plantation sector. It recommends investors to invest in high dividend-yielding companies, given the strong cash flows generated in the past two years.

The research team’s top pick is IOI Corporation, due to its downstream margins, which are stronger than its peers. This will be able to cushion any CPO price downtrend, it added.