KUALA LUMPUR (March 12): Plantation analysts expect a further decline in palm oil inventory in the coming months — after hitting a seven-month low in February — which will support the high average selling price of crude palm oil (CPO) in the face of tight supply, driven by reduced buying activities post-Chinese New Year and Ramadan.

Unless the South American harvest surprises the market on the downside, analysts reckon the seasonal uptrend in CPO price will reverse gear sometime in the second quarter of this year, in anticipation of output recovery.

Analysts are still maintaining their "neutral" stance on the plantation sector. The Bursa Malaysia Plantations Index rose 0.26% to 7,321.82 at Tuesday’s noon break. Year-to-date, the index has risen over 5%.

The recent Malaysian Palm Oil Bard data showed that the February palm oil stockpile dropped to 1.92 million tonnes as lower exports were more than offset by lower opening stocks and production, as well as higher domestic consumption.

In a note on Tuesday, Maybank Investment Bank said the CPO price is likely to stay supported at the current level of RM4,000 per tonne till end-March or early April as palm oil production is presently in its low output cycle.

“From 2Q (second quarter) onwards, we anticipate palm oil output to pick up and hit its peak sometime in 3Q. This will pressure CPO price on the downside once supply is no longer tight.

“Further, CPO price upside is presently capped by its narrowed price discounts (relative to historical averages) against other major competing vegetable oils,” said Maybank Investment.

At the point of writing, the benchmark palm oil futures for June delivery was trading at RM4,020 per tonne on Bursa Malaysia Derivatives.

Amid a surge in demand during the Ramadan period, Public Invest Research expects the CPO price to increase to above RM4,000 per tonne in the next two months, it said in a separate note. “However, the projected bumper harvest for soybeans in the middle of this year could put some pressure on CPO price in the second half of 2024.”

Kenanga Investment Bank, meanwhile, foresees continued weak downstream margins for the next couple of quarters, putting pressure on earnings for major integrated players such as IOI Corp Bhd, Kuala Lumpur Kepong Bhd, and Sime Darby Plantation Bhd.

As such, Kenanga said it favoured PPB Group Bhd for its strong agro-based and consumer essential businesses in Malaysia and the region. It has an "outperform" call for the stock, with a target price of RM18.50.