Photo by Attila Janosi

By Jessica Wee

The CPO price spiked to RM5,749 per tonne last week following the continuous supply decline in Malaysia and on the back of Indonesia’s CPO exports restrictions which pushed Malaysia’s CPO demand higher. The gains were also influenced by stronger soybean oil performance in the US.

The backstory – Malaysia had its first taste of oil palm planting about 100 years ago. The British brought planting materials for cultivation here.

Over the years, Malaysia, through research and development, has built oil palm to become what it is today. Malaysia and Indonesia produce 86% of the world’s palm oil. Among vegetable oils, palm oil is the most labour-intensive with low productivity. A worker can produce up to 20 tonnes of oil a year compared to up to 600 tonnes for US soyabean and UK rapeseed.

Labour has been a growing problem for oil palm planters today, especially with the massive greenfield development in Indonesia over the last two years. Malaysia has been facing labour shortage since the beginning of the Covid restrictions.

It is also difficult to automate the harvesting process for palm fruits. Although this vegetable oil is versatile in its uses, palm oil usage is subject to criticism especially in the western countries. With pictures of land clearing and animals losing their natural habitat, many western countries have chosen to avoid using palm oil in their products.

In an attempt to promote the benefits of palm oil and counter Western propaganda against it, Malaysia is mulling to sign a memorandum of understanding (MoU) with the Savola Group of Saudi Arabia on three areas of cooperation.

This includes the construction of a tank storage terminal in Jeddah, using Saudi Arabia as a re-export hub for Malaysian palm oil and a joint campaign to promote the benefits of Malaysian palm oil.

In mid January 2022, Indonesia imposed a rule for a mandatory portion of CPO to be sold domestically and applied a ceiling price of 9,300 rupiah per kg for CPO. This restriction is applied to all cooking oil exporters and they are required to sell 20% of their planned export to its domestic market. This restriction helped to drive up the demand for Malaysian CPO, and hence the price.

Maybank Investment Bank noted that the relatively more Malaysia-centric growers such as IOI Corp, Sarawak Oil Palm (SOP), Boustead Plantations (BLANT), Ta Ann (TAH), TH Plantation (THP), Hap Seng Plantations (HAPL), and FGV are clear beneficiaries from the policy.

It also added that there are several risk factors that may affect the palm oil sector view, earnings estimates, price targets, and ratings of stocks under coverage.

“The upside risks are namely weaker-than-expected production recovery of palm oil and other vegetable oils in 2022; Brent crude oil price inching closer to US$100 per barrel and weather anomalies at major palm oil and oilseeds producing regions.

“Meanwhile, downside risks are Brent crude oil price falling sharply to below US$60 per barrel; negative policies imposed by importing countries; unfriendly government policies at producing or exporting countries; stronger production in 2022; as well as weaker global demand and weaker competing oil prices,” it said.

*Top Malaysian CPO stocks