Local upstream plantation firms are like to benefit from the rising Crude Palm Oil (CPO) prices, said CGS International based on bullish outlook of speakers at the Indonesia Palm Oil Conference 2024 who have tabled CPO price projection of RM4,500-5,000/tonne for the first half of 2025.

Supporting factors cited were strong Indonesia biodiesel demand, slower palm oil production growth and tight supply in other vegetable oils and fats.

The upbeat projection for the first half of 2025 contrasts somewhat with the predicted price levels put forth by local market analysts and economists, who have projected the CPO prices in 2025 to be below RM4,000/tonne, from RM3,650/tonne1 to RM3,900/tonne2.

Analysts believe that upstream palm oil players which are likely to benefit from the rising CPO prices are Hap Seng Plantations Holdings Bhd, Ta Ann Holdings Bhd, SD Guthrie Bhd.

On Nov 12, Hap Seng Plantations' stock traded at RM2.07 as at 2:11pm, up three sen from its previous settlement of RM2.04 on Monday. Towards closing, the counter traded up, gaining 23 sen intraday to settle at RM2.27. Today, as at 12:04pm, Hap Seng Plantations' stock stood at RM2.14, down 13 sen from its previous closing of RM2.27 recorded yesterday. (Stock updates from Bursa Malaysia)

As at 12:11pm Nov 13, Ta Ann's shares traded at RM4.61, up two sen from its previous closing of RM4.59.

As at 12:13pm Nov 13, SD Guthrie's stock traded at RM5.04, down 11 sen from its previous closing of RM5.15.

CGS remains NEUTRAL on the sector given that the downstream operations of integrated companies, such as Kuala Lumpur Kepong Bhd (KLK) and IOI Corporation Bhd, still face challenges amid high feedstock prices. For mid-size upstream players, analysts expect potential positive earnings surprises and higher dividend payouts.

Analysts noted that while the speakers' projection aligns with its view that CPO prices will stay elevated in the first six months of 2025, particularly in the first quarter, driven by tight palm oil supply and strong seasonal demand from Chinese New Year and Ramadan. However, the speakers' upbeat CPO projection, coupled with the recent rally of CPO prices to close to RM5,000/tonne, now puts CGS' 2024 and 2025 earnings estimates on the conservative side as the earnings forecast figures are based on an average CPO price of RM4,000/tonne.

CPO price is now at a premium over soybean oil and sunflower oil. Typically, palm oil is the cheapest of the major vegetable oils. This shift in pricing is notable, particularly in some destination markets where CPO has been more expensive than other vegetable oils since April to May 2024.

In details, conference speakers cited the below factors as driving the increase in CPO prices in the first half of 2025.

a) Stronger biodiesel demand from Indonesia. The Indonesian government's B40 mandate, set to take effect in January 2025, is expected to tighten palm oil supply. With the full implementation of B40, Indonesia's palm oil consumption could increase by 2 million tonnes to 14 million tonnes, or around 17% of global palm oil production for 2025. The government aims to implement B50 by 2028, further boosting demand.

The current Indonesia B35 biodiesel programme uses palm oil as feedstock, with the country's Ministry of Energy and Mineral Resources expecting 11.7m tonnes of CPO to be consumed for this purpose in 2024. This translates into 24% of Indonesia's palm oil consumption and 13% of global palm oil consumption, based on CGS' estimates.

b) Slower palm oil production growth. The lower-than-expected production growth from Indonesia and Thailand should support palm oil prices and most of the speakers projected 2024 Indonesia palm oil production to decline by 4-8% year-on-year (YoY). For 2025, the speakers expect Indonesia production growth of 2-4% YoY while projecting flat production growth in 2025 for Malaysia.

c) Tight supply in other vegetable oils and fats. The global supply of sunflower and rapeseed oil is expected to decrease YoY in 2025. While soybean production is likely to remain strong, soybean oil output may not increase at the same pace due to an oversupply of soybean meal, which limits the availability of soybean oil as a by-product.

Dorab Mistry from Godrej International projects a 3 million-tonne increase in global vegetable oil supply for 2024 and 2025, and demand growth of 6.5 million tonnes.

(d) The number of funds trading in the Dalian Commodity Exchange (DCE) Palm futures is growing. The open interests of DCE palm futures amounted to nearly 800,000 contacts, only slightly below the highs recorded in July.

Mistry from Godrej International and Ryan Chen from Cargill Investment China both mentioned that the recent surge in CPO prices may have been partially driven by increased participation of non-commercial players in Dalian and Bursa Malaysia palm futures.

1. Source: Affin Bank Bhd-hosted Propelling Malaysia Forward Conference 2024 held in Penang on Nov 11, 2024. ︎
2. Source: RHB Investment Bank Bhd-issued company update IOI Corp : Decent Valuations Amid Higher CPO Price; BUY (12 Nov 2024) ︎