KUALA LUMPUR (Nov 5): Palm oil prices will strengthen in 2025, as tight supply of edible oil boosts earnings of Malaysian planters, AmInvestment Bank said in recommending that investors add exposure to the sector.

Crude palm oil (CPO) may average 6.3% higher in 2025, thanks to shortages of palm oil, as well as that of competing rapeseed and sunflower oils, the research house said in upgrading the sector to “overweight”. Further, growing biodiesel use and restrictions will curb Indonesia’s exports, it noted.

“We expect palm oil production in Malaysia to ease after a bumper harvest in 2024, and the ongoing freeze in foreign worker recruitment,” AmInvestment said and raised its projections for CPO price to RM4,250 per tonne.

Prices of the edible oil used in everything from lipstick to diesel have climbed this year, as poor weather conditions in Malaysia and Indonesia, which together account for more than 80% of the global supply, stoked concerns over output.

The benchmark third-month CPO futures have climbed 33% so far this year, averaging nearly RM4,000 per tonne. Bursa Malaysia Plantation Index, which tracks 43 stocks in the sector, has gained about 9% year-to-date.

AmInvestment’s forecast stood in stark contrast to Malaysia’s official projection in October that called for CPO price to ease to RM3,500-RM4,000 in 2025, as the government expects production to rise with an increase in harvesting activities, amid better weather and labour conditions.

Unlike in previous years, CPO prices may not fall sharply in the remaining months of 2024, as importers step up purchases before the European Union Deforestation Regulation (EUDR) is implemented at the end of 2025, AmInvestment noted.

The EU would be short by as much as 600,000 tonnes, if just 10% of the usual annual imports of five- to six million tonnes of palm products fail to comply with the onerous regulation, the house said, noting that smallholders account for 30%-40% of CPO production in Indonesia, and 26% in Malaysia.

For strategy, AmInvestment’s top pick is Kuala Lumpur Kepong Bhd (KL:KLK) for the young age profile of its oil palm trees and strong recovery in downstream earnings.