Home Palm oil could hit RM5,000 in next few months but unsustainable beyond 1Q — HLIB

Palm oil could hit as high as RM5,000 per tonne over the next few months, though the high prices are unlikely to be sustained beyond the first quarter, Hong Leong Investment Bank (HLIB) flagged.

Production will likely be weak in the near term from seasonally weakness, coupled with unusually high rainfall in both Malaysia and Indonesia, the research house noted. Indonesia’s commitment to the B40 biodiesel mandate and aggressive restocking activities ahead of Ramadan will also sustain prices, it said.

However, the “price strength will dissipate”, HLIB warned, as palm oil’s price premium over other competing vegetable oils is not sustainable over the longer term, while supply improves in absence of major weather events that will cap prices.

Prices of crude palm oil (CPO), used in everything from lipstick to biodiesel, gained 20% last year whipsawed by worries over supply and concerns over the burgeoning inventory. The benchmark third-month delivery was trading at RM4,269 on Thursday.

CPO’s premium over soybean oil has surged to US$173 per metric ton with a bumper global soybean production season. That compares to average discounts of US$293 (RM1,318) in the last three year and US$220 in the past five years.

However, the large premium is “unjustified”, as high CPO prices will result in demand rationing, and prompt key vegetable oil importing countries to switch to cheaper alternative vegetable oils, HLIB said.

Production of CPO meanwhile could improve from weaker shocks from mild La Nina weather conditions that will bring rainfall to certain parts of Indonesia, which were experiencing lingering effects of the drought in 2023, the house said.

HLIB also flagged the risk of slower-than-expected implementation of B40 in Indonesia — which mandates a mix of 40% palm oil with 60% diesel — following recent delays for infrastructure adjustments and other technical details.

For now, HLIB is keeping its CPO price assumption at RM4,000 per metric ton for this year, as well as its ‘neutral’ call on the sector.