KUCHING: Industry analysts within the plantation sector are divergent in their forecasts for the fourth quarter of 2016 (4Q16) as estimates for crude palm oil (CPO) prices range widely from RM2,200 to RM3,000 per metric tonne (MT).
These results were derived from a plantation sector update by the research arm of Kenanga Investment Bank Bhd (Kenanga Research) where the research arm discussed and reported the recent events and announcements from the recently held Malaysian Palm Oil Council (MPOC) Malaysian Palm Oil trade Fair and Seminar in Kuala Lumpur.
Within the sector update, the research arm noted that the wide range of forecasts between top industry analysts were slightly more pessimistic as compared to the Bursa’s Palm and Lauric Oils Price Outlook Conference & Exhibition (POC2016) estimated range of RM2,200 to 3,200.
The expected El Nino driven price rally in early 2017 was observed by analysts to not have materialized due to weaker than expected demand in India and the release of rapeseed oil reserved in China, which led to the partial offset of fairly substantial stock draw downs in Malaysia and Indonesia.
“Based on figures by experts who provided full-year averages, we calculate an average 2016 CPO price of RM2,540 per MT which is 3 per cent below the POC2016 average of RM2,631 per MT; in line with the more bearish range forecast.
“This is also in line with our latest FY16 CPO expectation of RM2,500 per MT,” explained the research arm.
However, it is observed that consensus average CPO price of RM2,625 per MT is 9 per cent higher than Kenanga research’s expected RM2,400 per MT.
“We think this could be overly optimistic as second half 2017 (2H17) production is widely expected to recover strongly, with full-year production potentially exceeding losses seen in 2016. Hence, barring significant production disruption of other oils, or a substantial demand spike, CPO prices in 2017 are unlikely to exceed prices in 2016.” opined the research arm.
According to Thomas Mielke, executive director of Oil World, palm oil is currently undervalued due to low palm stock and export supplies, and a slow than expected recovery in production.
As such, Mielke is predicting a potential price rally of up to RM2,900 to RM3,000 per MT.
“Despite his ebarish outlook of RM2,200 per MT by December 16 due to aforementioned unfavourable factors, Dorab Mistry, director, Godrej International Ltd. thinks that a weather problem such as La Nina could very quickly reverse palm oil sentiment” reported the research arm.
“The range is in line with our 4Q16 CPO price range of RM2,400 to RM2,900 per MT, with the top-end supported by the weak stock situation and further upside potential of RM150 to 200 per MT if a moderate La Nina develops” added the research arm.
Potential risks to these a further volatility and downturn within the plantation sector were opined by several analysts to include the risk of the Chinese government further selling its rapeseed oil reserves, weakness in biodisel production, and a surge in 2H17 production.
With rumors of approximately, 1 million MT of rapeseed oil to be auctioned by the end of the year out of China’s 3.8 to 4.0 MT remaining reserves, the scenario presents itself as a significant risk to the plantation sector.
Similarly, biodiesel production weakness is also observed by analysts to be a huge risk as the Indonesian biodiesel production could be flat to lower in 2017 as their government subsidy fund has largely drawn down its initial cushion from the start of its mid 2015 levy collection.
“We note that a strong US soy harvest and chatters of a US rate hike could also pose risk to CPO prices.” added the research arm.
Despite these risks, the research arm reported that all experts had agreed that 2H17 production is likely to see a strong recovery as trees recover from the recent droughts.
“As a result, most experts were only bullish on CPO prices up to 1Q17, and concurred that prices are likely to see a downtrend in 2H17, in line with our house view.” noted the research arm.
Kenanga research has decided to maintain their ‘Neutral’ trading view on the plantation sector with no change to their FY16-17E CPO price forecast of RM2,500 to RM2,400 per MT.
Among the stock covered by the research arm, it was stated that upstream planters such as Ta An Holdings Bhd (TAANN) and United Malacca Bhd (UMCCA) are preferred by the research arm as their younger tree age would potentially offset production risk while ensuring above average fresh fruit bunch (FFB) growths over the long term.