AS India’s policies on palm oil imports take the market by surprise, Malaysian planters can still take comfort in the current crude palm oil prices, which could lead to better earnings this year after several years of depressed CPO prices.

Since late December, CPO prices have  been breaching the RM3,000 level. Last Wednesday, CPO futures were trading at RM3,052 while the CPO spot price was RM3,048 per tonne.

Many opine that the surge in CPO prices can be partly linked to the news that India, the world’s largest purchaser of edible oil, had on Dec 31 cut the import tax on CPO and refined palm oil from Southeast Asian countries.

Nevertheless, a bigger reason for the gains can be attributed to the expectation of tighter inventory levels this year.

Last November, Malaysia’s palm oil stocks fell 4% month on month and 25% year on year to 2.26 million tonnes. This was the first time since November 2011 that inventory levels recorded were lower m-o-m.

Inventory levels fell further in December, down 11% m-o-m to 2.01 million tonnes.

Notably, CPO prices have been on the rise since the last quarter of 2019. The futures market for CPO rose 41% from RM2,157 per tonne on Oct 14, 2019, to RM3,042 per tonne on Jan 7. Meanwhile, the CPO spot price gained 52.5% from RM2,010 per tonne on Sept 30, 2019, to RM3,066 on Jan 7.

“At current levels, I don’t think it is sustainable. I believe the price now is a result of panic buying because many expect production levels to be down,” says TA Securities Research analyst Angeline Chin. Her forecast for the CPO price this year is RM2,600 per tonne.

An analyst from a local research house believes that the current price levels will probably last till the end of the first quarter (1Q2020), before falling to more “normalised” levels of below RM3,000 per tonne in 2Q2020.

On the other hand, Public Invest Research analyst Chong Hoe Leong takes a more bullish stance on CPO prices.

“For 1H2020, my forecast is that CPO prices will at least be within the range of RM2,700 to RM2,800 per tonne. This is supported by inventory tightening, where I believe February and March will be the tightest months in terms of inventory,” he says.

February has shorter working days and longer holidays while China is expected to replenish its inventories after the Lunar New Year celebration, Chong explains.

Last Wednesday’s news that India would impose restrictions on imports of refined palm oil and palm olein did not have any impact on CPO prices. The measure by the Indian government comes within two weeks after the announcement of the lowering of import tax on CPO and refined palm oil.

Indian refiners were outraged by the lowering of the tax as this meant that the spread between CPO and refined palm oil would became narrower, making it more attractive to import refined palm oil than CPO.

India’s imports of Malaysian palm oil almost doubled to 4.27 million tonnes from 2.23 million tonnes during the 11-month period up to November last year compared with the previous corresponding period. It has been the biggest buyer of Malaysia’s palm oil since 2014.

Maybank Investment Bank Research says the restriction will result in a faster build-up of Malaysian Palm Oil Board (MPOB) stockpile because Indian importers could switch to Indonesian growers as Indonesia tends to be more price competitive than Malaysia.

“We believe Indonesia will gain more market share at the expense of Malaysia with India’s latest restriction. In turn, this will result in quicker build-up of MPOB stockpile when output starts to recover from 2Q2020, and will cap the CPO price upside as the world looks at MPOB’s stockpile as a proxy to the region’s overall stockpile in the absence of reliable Indonesian data,” explains the research house in a note on Jan 9.

Meanwhile, the research house adds that as Indian importers switch to CPO from refined palm oil, it will likely hurt Malaysian refiners as processed palm oil has ­accounted for over 70% of Malaysia’s total exports in recent years.

Public Invest’s Chong takes a different view. He believes the impact on CPO prices will be mild. While Indonesia will see a faster depletion in stockpile as Indian importers turn to Indonesia, the lower inventory levels in Indonesia will support prices.

He believes that the impact on yield, as a result of lower fertiliser application on oil palms, will last for nine to 12 months, thus keeping production growth down.

Small farmers who make up 17% and 41% of the industry in Malaysia and Indonesia respectively have in the last two years reduced their application of fertiliser on their oil palm trees to manage costs as CPO prices remained low.

Better earnings prospects, but good news priced in

As news continues to develop in the world’s largest edible oil buyer, one thing for sure is that planters are set to enjoy better earnings this year after several years of depressed CPO prices.

Palm oil players, says CGS-CIMB Research in its 2020 outlook report dated Dec 19, 2019, are expected to report significantly better earnings this year and the research house predicts that quarterly earnings could have bottomed in the second quarter of last year.

“Upstream planters should report better earnings, driven by higher output (from improvement in yields from younger estates) and CPO prices,” it adds.

For 2020, the price of CPO forecast for the year by analysts averages RM2,450 per tonne. The range between the research houses varies widely between RM2,300 and RM2,700 per tonne.

The average forecast of RM2,450 per tonne is higher than the average spot price of RM2,115 per tonne for 2019.

This year, the confluence of factors affecting production growth and tightening supply seems to be creating the “right” push for higher CPO prices.

The slower production growth expected this year is a result of a persistent period of dry weather last year, lower fertiliser application that will impact yields and fewer replanting activities in recent years.

Meanwhile, demand growth is likely to remain healthy. According to MIDF Research in a report, the demand growth is expected to be underpinned by domestic consumption through a higher biodiesel mandate and exports to markets such as India, China, Europe and the Middle East and North Africa (MENA) region.

“I believe the big winners who will be able to take advantage of the higher CPO prices this year are planters with younger tree profiles and good fresh fruit bunches (FFB) production growth. These will be companies like Ta Ann Holdings Bhd, Sarawak Oil Palms Bhd and TSH Resources Bhd,” says Chong.

CGS-CIMB Research has a similar view. “We are selective in our top picks, preferring companies with younger estate profiles, lower CPO costs of production relative to the industry, good earnings leverage to higher CPO prices, and attractive valuations. Our key picks for Malaysia are Kuala Lumpur Kepong Bhd, Genting Plantations Bhd, Hap Seng Plantations Holdings Bhd and Ta Ann Holdings Bhd,” says the report.

Having said that, an analyst says that much of the good news have been priced into the share prices of plantation companies.

“If you look at the share price performance of plantation companies in 4Q2019, you can see that many of these counters have run up. The prices have already included the higher CPO prices that we can expect to see this year. I don’t think the news about India restricting refined palm oil would impact prices much.

“In my opinion, the valuations of plantation companies are a bit stretched at this point,” he adds.

The KL Plantations Index gained 13.7% to 7,640.66 points from Oct 1, 2019, to Jan 8. The average 2020 forecast price-earnings ratio for the index sits at 33.07 times.