Monsoon season drives continued decline in CPO production

Crude palm oil (CPO) production is projected to decline further in the coming months due to the ongoing monsoon season and the typical seasonal drop in output, according to analysts.

Malaysian palm oil inventories fell 2.6% month-on-month to 1.84 million tonnes in November 2024, slightly above consensus estimates of 1.8 million tonnes, but in line with projections by CIMB Securities.

However, production challenges from heavy flooding in key regions could push December stocks down another 7% to 1.7 million tonnes, and according to CIMB, CPO production is also expected to decline by 13% month-on-month in December to 1.41 million tonnes.

Despite tight supplies supporting CPO prices, analysts anticipate a “neutral to negative” price response due to higher-than-expected stock levels and the current price premium over competing edible oils.

The research house noted that the record price premium over soybean oil (US$147/tonne) and rapeseed oil (US$87/tonne) is likely to “prompt buyers to opt for cheaper alternatives, negatively impacting CPO exports in the coming months”.

CIMB Securities, which kept an “overweight” stance on the sector, also maintained their average CPO price forecast at RM4,150/tonne for 2024 and RM4,200/tonne for 2025.

In contrast, BIMB Securities reiterated a “neutral” call on the sector, stating that “elevated CPO prices are unlikely to sustain in the longer term”.

While CPO prices are expected to remain elevated into the first quarter of calendar year 2025 (CY2025) due to lower production and higher demand, “we believe prices will begin trading downward from the second quarter of CY2025 onwards,” said BIMB, as the firm maintained its average CPO price projection of RM4,100/tonne for both 2024 and 2025.

The projected decline is attributed to a seasonal increase in palm-oil production, ample global soybean supply, a widening price premium of palm oil over other edible oils, and diminished export competitiveness stemming from the strengthening ringgit against the US dollar.

Notable market players with “buy” calls from BIMB include Hap Seng Plantations Holdings (KL:HSPLANT), Sarawak Plantation Bhd (KL:SWKPLNT), and IOI Corporation Bhd (KL:IOICORP), standing to gain from the rally in CPO prices.

Looking forward, “we expect planters to report flat-to-stronger earnings in 4Q2024 and 2025, supported by higher CPO prices and increased production from Indonesia,” said CIMB.

However, BIMB cautioned on potential risks, including adverse weather conditions with prolonged heavy rain and flooding potentially disrupting yields and lowering production, higher-than-expected demand, and tighter global supply if Indonesia bans the export of palm oil for a longer period to prioritise domestic consumption.