KUALA LUMPUR (Jan 5): Crude palm oil (CPO) prices are expected to remain above RM3,000 per tonne in the first quarter (1Q) of this year, propped up by limited supply of major edible oils, low inventory levels in the larger edible oil consuming countries and the La Nina phenomenon, which has slowed soybean planting in Brazil and reduced yield in the US, said HLIB Research.

In a note today, its analyst Chye Wen Fei said there were concerns over a palm oil supply tightness in both Malaysia and Indonesia, as well as a seasonally low production cycle for palm oil resulting in lower inventory levels.

Chye noted that CPO prices are expected to soften from 2Q onwards as the supply outlook improves for major edible oils, resulting in more balanced demand and supply dynamics.

"We believe supply of major edible oils will gradually return to normalcy from 1Q21, supported by (i) higher palm production in Malaysia and Indonesia from March 2021 (based on the assumptions that labour shortage in Malaysia will gradually ease from 2021 onwards and La Nina does not strengthen further), and (ii) higher soybean production in 2021," Chye said.

Chye noted that Oilworld had projected that total soybean supply will increase by 7% to 361.8 million tonnes in 2020-2021, due to higher planting acreage.

"Besides, farmers in the US may plant significantly more soybean (at the expense of corn), given the high soybean price currently," Chye said.

The analyst also noted that the current high palm oil-gasoil (POGO) spread and price spread between CPO and soy oil also points towards weaker CPO prices.

Chye reiterated that CPO prices will hover at RM2,700 per tonne on average for 2021 to 2022 and a "neutral" stance on the sector.

"For exposure, or top picks are Hap Seng Plantations Bhd (buy: target price: RM2.17), IJM Plantations Bhd (buy: RM2.17) and TSH Resources Bhd (buy: RM1.38)," she said.