Palm oil prices to soften in near term, structural issues threaten long-term outlook, Phillip Capital flags

Palm oil prices could weaken in the near term, while stagnating estate development and narrowing cost advantage to its alternatives pose long-term threats to the sector, a research house said.

Crude palm oil prices (CPO) per tonne are expected to decline to RM3,700-RM4,000 till end of June, and average at RM4,000 in the second half of 2025, as production picks up seasonally, Phillip Capital said in initiating coverage on Malaysia’s plantation sector with a “neutral” call.

“This expected price softening reflects a recovery in global edible oil supplies, increased soybean-oil crushing activity, potentially weaker biodiesel demand, and subdued consumption growth amid ongoing global macroeconomic uncertainty,” the house said.

In first three months of 2025, CPO prices averaged RM4,723.83 per metric tonne.

Over longer-term, demand growth may come under pressure, as its cost and yield advantages against soybean oil and sunflower oil gradually diminish, prompting importing countries to shift towards more competitively priced alternatives, Phillip Capital noted.

The three-month futures for palm oil were trading at a discount of US$196 (RM830.20) to soybean oil, compared to a five-year average discount of US$225. “This reduced gap could undermine CPO’s cost competitiveness and incentivise substitution by major importers,” it said.

Further, lack of development has led to declining productivity and an ageing tree profile, which undermines the sector’s long-term competitiveness, Phillip Capital flagged.

The average annual growth of planted area slowed to just 0.4% over 2014-2024, with a 1.7% contraction observed between 2019-2024, which Phillip Capital said signals a stagnation in estate development.

Replanting activity, meanwhile, remains below the recommended level of 4%-5% annually, averaging at 2%-4%, “which hinders the ability to rejuvenate ageing trees and recover yield potential,” Phillip Capital said.

The structural constraints are reflected in the sector’s flat output at 19.4 million tonnes in 2025, according to Phillip Capital. In contrast, production in neighbouring Indonesia is projected to bounce to 50 million metric tonnes in 2025.

“This divergence highlights Malaysia’s growing structural disadvantages, as production stagnates without large-scale replanting and yield improvement initiatives,” it added.

On stock picks, Phillip Capital named SD Guthrie Bhd (KL:SDG) as its large-cap pick, citing its diversified landbank, strong upstream contribution, and strategic diversification into the non-food downstream segment.

On small caps, the house selected Sarawak Plantation Bhd (KL:SWKPLNT)(target price:RM2.88) due to its “relatively young” estate age profile and dividend yield.

SD Guthrie shares were up one sen or 0.22% to RM4.59 on Monday morning on Bursa Malaysia, while shares of Sarawak Plantation were untraded so far, and last closed on Friday (June 6) at RM2.46.