Will SGX-listed plantations be shaken by volatility in crude palm oil prices?

Forecast suggests that CPO prices will remain elevated for 1H22.

Prices of crude palm oil (CPO) remain volatile due to three major issues: the Russia-Ukraine war, fertilizer availability, and labour issues in Malaysia. These three “wild cards,” according to RHB will likely affect the supply of CPO and, therefore, its prices.

Based on RHB’s report, SGX-listed plantations such as Golden Agri, First Resources, and Bumitama Agri have sensitivity to changes in CPO prices.

For example, Golden Agri might see an 8% to 10% net profit change for every MYR100.00/tonne change.

Meanwhile, RHB estimates that First Resources and Bumitama Agri will see a 6%-8% and 7%-9% change in their net profit for every MYR100.00 /tonne change, respectively.

RHB's current price assumptions are at MYR4,300 per tonne for 2022 and MYR3,700 per tonne for 2023.

Looking ahead, the analyst said CPO prices will likely be elevated  supply and demand of vegetable oils and
CPO look relatively tight for 1H22, keeping prices high.

“Stock/usage ratios for the major vegetable oil complexes and CPO are expected to improve in 2022, which should mean that CPO prices will moderate in 2H22,” RHB said.

However, the analyst clarified that this will only come to fruition if the three wild cards will not eventuate.

To note, Russia in Ukraine are large producers of sunflower seeds, and also produce soybean and rapeseed.

“Should Ukraine planting not take place, stock/usage ratio for 10 oilseeds could fall further,” RHB explained.

“Assuming the worst-case scenario of zero planting, we estimate the stock/usage ratio of the 10 oilseeds could fall to as low as 13.6% in 2022F (from 19% in 2021), below the historical average of 16.1%,” the analyst added.

Since Russia is also a fertilizer producer, alongside Belarus, the supply of fertilizer remains at risk, according to RHB.

“If supplies from Russia and Belarus remain unavailable, planters would need to change the composition of fertilizer application. While most planters have some carry forward stock of fertilizer from 2021, this will only last them through to part of 1H22,” the analyst explained.

“Planters have generally managed to secure supplies of fertilizer for application in 1H22, but 2H22 remains a question mark. Should supply be unavailable, production of vegetable oils will be affected in 2023,” RHB added.

Meanwhile, RHB said if the Malaysian labour issue won't be addressed during the year, the country's production could see a third consecutive year of decline.

Current estimates for Malaysian output for 2022 are 3-4% growth to 18.5m tonnes.