Upstream planters look set to stay key, but downstream a drag
It it a tale of two worlds in the plantations sector as the upstream margins for plantations are set to improve over 2024-2025 but downstream is slated to stay weak.
According to an analysis by Kenanga Investment Bank Bhd (Kenanga Research), upstream margins are expected to improve, albeit slightly, over 2024-2025 on the back of firm but flattish CPO prices amidst easier operating cost environment.
This comes as global balance of edible oil is expected to stay tight in 2024, potentially up to mid-2025.
“Supply is expected to just about meet demand in 2024 with risk of even coming short. Therefore, 2025 is expected to start the year with lower YoY inventory levels or flattish at best,” it said in the report.
“While tighter inventory is supportive of even higher prices, it is a tightening from abovetrend level in 2023 towards the longer-term average; hence, our assumptions of firm but flattish CPO price of RM3,800 per MT over 2024-2025.
“Production cost should ease as global fertiliser and fuel costs have been trending down since mid-2023. Nevertheless, January-February 2024 prices are still five to 10 per cent lower compare to 4Q23.
“However, minimum wages in Malaysia may be raised by five to 10 per cent given the cumulative official inflation of six per cent over 2022-2023.”
Meanwhile, the analysis cite that palm kernel (PK) prices may be approaching the bottom. Although February 2024 PK prices weakened, palm kernel oil (PKO) prices picked up.
“While it is still too early to conclude this uptick is a trend, it is encouraging as we are expecting some restocking to nudge up oleochemicals demand as the second half of 2024 approaches.
“If PK oil demand picks up, the buying for PK would eventually tick up as well.”
Looking at the downstream segment, margins likely to stay weak for another quarter or two. Kenanga Research expect a mixed outlook for downstream, poor for basic, more commoditised oils and fats as well as basic oleochemicals.
Specialty or performance specific oils and fats such as cocoa butter equivalent or customised oleochemicals to meet specific pharmaceutical for example should continue to enjoy better margins even if the broader market is soft as volume for specialty products can be small.
Palm kernel oil prices may be bottoming but sustainable recovery may still need time.
The earliest beneficiary is the upstream sector then only the downstream oleochemical segment as and when the world economic outlook brightens.
“A byproduct of milling fresh fruit bunch to extract CPO, PK is sold and the proceeds applied to reduce CPO production cost. Consequently, the first to benefit from higher PK prices is upstream.
“Meanwhile, PKO is an important oleochemical input so higher PKO prices means higher cost to oleochemical producers until their end-product selling prices can be raised.
“Our current expected scenario, is for the oleochemical sector to undergo some restocking; thus, raising the demand for PKO and hence eventually the requirement for PK as well.
“However, the underlying oleochemical market may need a brighter global economic outlook before any meaningful demand and hence selling price hikes can be sustained. Such recovery may have to wait till 2025 or beyond.”