MIDF: CPO exports to recover in 2021 on back of gradual economic recovery

In a research note today, MIDF said the CPO export demand saw an improvement in the fourth quarter of the financial year 2020 (4QFY20). However, the volume of export demand started to tone down early this year.

"January 2021 export came off -42.3 per cent month-on-month (m-o-m) to 0.95 million tonnes, while February 2021 export was down by -5.5 per cent.

"The downward trend is attributed to, among others, Malaysia's reinstatement of export tax (8.0 per cent) on CPO, effective Jan 1, 2021, recovery of China's hog industry from the African swine fever virus and India's implementation of higher import duty on CPO by 5.5 per cent to 35.75 per cent," it said.

Meanwhile, MIDF said following Prime Minister Tan Sri Muhyiddin Yassin's visit to Saudi Arabia recently, Riyadh has committed to increasing its imports of Malaysian palm oil from 318,000 tonnes to 500,000 tonnes.

"The 57 per cent increase in CPO export to Saudi Arabia this year should contribute positively to plantation players' earnings.

"However, we posit that the impact would not be huge as Saudi Arabia only constitutes 2.0 per cent of Malaysia's palm oil exports," the MIDF said.

On the production of CPO, the research house expects recovery, albeit below potential, after the second quarter of 2021, given the high reliance on foreign workers.

In the longer term, it expects production to increase significantly as smallholders would be more aggressive in applying fertilisers during periods of high CPO prices and better economic conditions.

"The production level early this year has shown a significant decrease where the January 2021 production level was lower by -15.5 per cent m-o-m to 1.13 million tonnes, while the February 2021 production level dipped by -1.9 per cent m-o-m to 1.11 million tonnes.

"This also represents the weakest monthly level observed since February 2016," it said.

The lower production was attributed to lower fertiliser application, minimal new planting of oil palm globally over the past few years and weaker fresh fruit bunches (FFB) yields due to the higher frequency of rainfall.

MIDF noted that another factor that contributed to the lower volume of production was the continued shortage of foreign labour due to the COVID-19 border closure.

As for FFB yields, it has shown a downward trend since 2017, primarily attributable to the cutback on fertiliser application, mainly by smallholders in the late second half of 2018, drought in 2019, and ageing palm profile.

It revises its 2021 CPO price forecast by 11 per cent to RM3,000 per tonne from RM2,700 per tonne previously.

In line with this, MIDF has upgraded the plantation sector to "positive" from "neutral".

MIDF's top picks for plantation companies include Kuala Lumpur Kepong Bhd (KLK), TSH Resources Bhd and IJM Plantations Bhd.

At lunch break today, KLK was up 0.26 per cent to RM23.16, TSH slipped 0.93 per cent to RM1.07, and IJM was 2.26 per cent higher at RM1.81.