KUCHING: Upstream plantation division earnings in the second half of 2020 (2H20) has been projected to fare better while the outlook for downstream manufacturing divisions remains lacklustre.
According to Affin Hwang Investment Bank Bhd (Affin Hwang Capital) in its Malaysia plantation sector update, upstream plantation division earnings will be driven mainly from the continuous pick up in fresh fruit bunch (FFB) and crude palm oil (CPO) production.
“We expect upstream plantation division earnings in 2H20 to be better, driven mainly from the continuous pick up in FFB and CPO production as weather normalises after the effect of dry weather in 2019 and also as we enter the peak production period towards October-November,” Affin Hwang Capital said.
That said, the research firm noted this could partially be offset by lower CPO prices in 2H20.
Affin Hwang Capital gathered that most plantation companies expect FFB production ratios for 1H:2H would be closer to 40:60 for 2020 from the usual 45:55.
It highlighted that the higher production and increase in mills utilisation rates should bring down the unit production costs.
“On the other hand, the outlook for downstream manufacturing divisions remains lacklustre as demand for products at oleochemical and specialty fats sub-segments are expected to remain uncertain due to the Covid-19 pandemic and the prevailing unfavourable palm-oil gas oil (POGO) spread.”
On palm-oil prices, Affin Hwang Capital observed that these have seen some recovery from the year-to-date low in May 2020 of RM2,000 per metric tonne (MT) to the current level of RM2,800-2,900 per MT.
To note, CPO average selling price (ASP) for the first eight months of 2020 (8M20) was at RM2,494 per MT.
“The higher prices are partly attributable to the increase in demand for palm-oil products due to stock replenishment, lower palm-oil inventory levels as well as an increase in soybean oil prices, in our view.
“However, given that the Covid-19 pandemic is still evolving globally and uncertainties remain in the market in the short term, we are cautious on the outlook for the fourth quarter of 2020 (4Q20).”
The research firm thus maintained its CPO ASP assumption for 2020-21E at RM2,350 per MT-RM2,450 per MT.
On another note, Affin Hwang Capital also highlighted that La Nina could make an appearance towards year-end.
“Based on the US National Oceanic and Atmospheric Administration (NOAA) climate advisory report, the odds of La Nina developing in the fall and lasting through the winter is now higher at 55 to 60 per cent.
“The El Nino-Southern Oscillation (ENSO) cycle can greatly influence global weather, which can cause major disruptions to the world’s agricultural production and supply.
“La Nina means more rainfall in Southeast Asia, thus potentially slowing down the harvesting process due to the wet weather.”