KUALA LUMPUR (Sept 11): The plantation sector is facing increasing pressure, as crude palm oil (CPO) loses its traditional price edge over soybean oil, raising concerns about palm oil's future competitiveness, analysts said.

Apex Securities in a note on Wednesday said this development, coupled with a strengthening ringgit, had dampened export demand for palm oil.

“We anticipate [palm oil] export growth to remain subdued in the coming months, as weaker demand, alongside the strengthening of the ringgit, will likely dampen palm oil exports,” it said.

Public Investment Bank also noted that rising palm oil inventories, which grew 7.3% month-on-month to 1.88 million tonnes in August, are contributing to the weakness in CPO prices. 

With CPO now trading almost on a par with soybean oil, the research house expects a subdued demand outlook for palm oil in the near term.

“We expect softer demand for CPO in the coming months, amid intensifying competition from rival soybean oil. 

“Soybean oil’s premium over palm oil has become zero now, compared with a high of US$565 (RM2,452)/MT in the past 12 months, partly due to a slump in soybean oil prices, while palm oil prices have gained 4.4% year-to-date,” Public Investment Bank added.

Moreover, both research houses flagged additional risks stemming from currency movements and weather patterns. 

Apex Securities noted that a strengthening ringgit against the US dollar is making Malaysian palm oil exports less competitive, while dry weather conditions could impact fruit yields and limit production growth, despite the current high production cycle.

On the other hand, Public Investment Bank warned of rising production, weaker demand and weather risks.

Even so, Apex Securities maintained its ‘neutral’ call on the plantation sector, and kept ‘hold’ calls on key players like Kuala Lumpur Kepong Bhd (KL:KLK) with a target price (TP) of RM20.35, Hap Seng Plantations Holdings Bhd (KL:HSPLANT) with a TP of RM1.79, and United Plantations Bhd (KL:UTDPLT) with a TP of RM27.21.

Public Investment Bank meanwhile recommended holding stocks such as IOI Corp Bhd (KL:IOICORP) with a TP of RM4.08, and KLK (TP: RM21.33), but noted potential upside for Sarawak Plantation Bhd (KL:SWKPLNT) with a TP of RM2.74, and Ta Ann Holdings Bhd (KL:TAANN) with a TP of RM4.88.

CIMB Securities struck a more optimistic tone, maintaining its ‘overweight’ call on the sector. 

The research house pointed to potential catalysts, such as Indonesia’s planned biodiesel mandate and ongoing Chinese investigations into rapeseed imports, as factors that could support palm oil demand.

“Other potential positive drivers of CPO prices include increasing weather risks from the transition of El Nino to La Nina, Indonesia’s plans to raise its biodiesel mandate from 35% to 40% and review its export levy, as well as potential Chinese sanctions on Canadian rapeseed imports,” it added.

CIMB’s top stock picks include SD Guthrie Bhd (KL:SDG) with a TP of RM5.10, IOI Corp with a TP of RM4.38, and Ta Ann with a TP of RM4.60.