InfoSAWIT, KUALA LUMPUR – Kenanga Research maintains an "overweight" rating for the plantation sector, supported by strong crude palm oil (CPO) prices and a sustained global supply deficit, despite weakening exports.

In its latest report, Kenanga Research revealed that data from the Malaysian Palm Oil Board (MPOB) shows that Malaysia's palm oil stocks fell to 1.512 million metric tons (MT) in February 2025. This figure represents a 4.0% month-on-month decline and a 21% year-on-year decrease, remaining below the average of the last 10 years.

CPO production in February 2025 faced pressure due to heavy rainfall, a shorter working month, and the Lunar New Year holiday from January 29 to February 12. This resulted in a 4.0% month-on-month decline and a 6.0% year-on-year decrease in production.

Meanwhile, CPO exports saw a sharp decline compared to the previous month, but remained stable year-on-year at 1.002 million MT. High CPO prices, reaching RM4,759 per MT—up 2.0% from the previous month and 20% higher than last year—have prompted buyers like India to switch to cheaper alternative oils, such as sunflower and soybean oil.

CPO Prices Expected to Rise

Kenanga Research forecasts that CPO prices will range between RM4,600 and RM4,700 per MT in the first quarter of 2025, higher than initial projections. Consequently, they have revised their CPO price assumptions for 2025 from RM4,000 to RM4,200 per MT.

However, Kenanga still predicts that the average CPO price in 2026 will drop back to RM4,000 per MT as the price gap between CPO and other vegetable oils narrows.

The ongoing global supply deficit continues to support vegetable oil prices, as evidenced by the Food and Agriculture Organization (FAO) vegetable oil price index, which rose 2.0% month-on-month and 25% year-on-year in February 2025.

"Poor harvests in Malaysia and the threat of bagworm infestations are also supporting CPO prices. However, the price premium of CPO over soybean oil remains, and it is expected to narrow when CPO prices decline while soybean oil prices remain stable or increase," the Kenanga report stated, as quoted by InfoSAWIT from Bernama on Saturday (March 15, 2025).

Kenanga Research also noted that the stagnation of palm oil plantation expansion since 2018/2019 has slowed supply growth to only 2.0% to 3.0% per year. With the majority of vegetable oil consumption used in the food industry (70%), biodiesel (22-25%), and oleochemicals and other sectors, biodiesel policy could be a determining factor in future price dynamics.

"If vegetable oil prices rise higher, the government is likely to reduce biodiesel blends to control food inflation, which is more politically sensitive," the report indicated.

From a production cost perspective, the upstream palm oil sector is expected to remain competitive in 2025. Although minimum wages in Malaysia and Indonesia have increased by 16%, and the Employee Provident Fund (EPF) contribution of 2.0% for migrant workers has come into effect, the increase in labor costs is predicted to be only 6.0% to 8.0% year-on-year.

With a combination of strong CPO prices and relatively stable production costs, Kenanga Research remains optimistic about the performance of the plantation sector throughout 2025. (T2)