KUALA LUMPUR, June 24 — Kenanga Research expects the price of crude palm oil (CPO) to stay firm, averaging at RM4,500 per tonne in 2022 and RM4,000 per tonne in 2023.

In a note today, the research house said the outlook was mainly based on supply needs, resilient demand for the golden commodity, and supportive biofuel demand.

"Current global edible oils tightness began when production dipped and failed to meet demand in 2020. Inventory slipped and continued doing so in 2021.

"If the pending second half-season goes well, 2022 inventory should edge up year-on-year but unlikely to exceed 2019 levels,” it said.

It also said that a favourable 2023 scenario is possible given that prices are still good but helpful weather is also needed and Malaysia’s labour shortage does not curtail palm oil output substantially.

Meanwhile, the research house said that demand for CPO continues to be resilient, underpinned by rising population and affluence where the annual consumption grew 3.0 per cent on average for the past 10 years, "However, growth during the Covid-19 years of 2020-21 moderated to around 1.0 per cent and we suspect 2022 growth is still hovering around 1-2 per cent, dampened by high prices.

"But a reversion back to 3.0 per cent growth as the world adapts to a new post-Covid norm is likely,” it said.

It also said that China has yet to fully emerge out of its zero-Covidpolicy and edible oil demand thus far has been subdued.

"Also, in the event of a global economic slowdown, demand contraction cannot be ruled out but it will probably be a long and severe downturn to produce such a negative outcome,” it said.

Kenanga Research noted that about 70 per cent of edible oils are consumed as food, hence the demand resilience, but just over 20 per cent ended up as biofuel last year.

"Due to elevated fossil fuel prices, especially after the Russia-Ukraine conflict, demand for biofuel has been good and is likely to stay supportive.

Therefore, Kenanga Research said the margins are expected to stay robust with production costs hovering between RM2,000 and RM2,500 per tonne after taking into consideration higher labour, fertiliser as well as fuel costs.

"Overall, the appeal of the plantation sector is no longer about earnings recovery but earning resilience especially when concerns over high inflation and a weakening economy are clouding the market,” it said.

Kenanga Research was upgrading the sector from "Neutral” to "Outperform” following a recent market sell-down which has made the sector even more attractive considering the sector’s defensive business and asset base.

Among the top picks are Kuala Lumpur Kepong Bhd (target price (TP): RM30, Boustead Plantations Bhd (TP: RM1) and TSH Resources Bhd (TP: RM1.90). — Bernama