KUALA LUMPUR (Oct 20): Oil World editor and chief executive officer (CEO) Thomas Mielke has told analysts that prices of vegetable oil including crude palm oil (CPO) are expected to be impacted by higher prices of soybean until the first half of 2021 (1H21) after taking into account delayed planting of soybean in Brazil and the lack of selling interest of the commodity by Argentina.

UOB Kay Hian analysts Leow Huey Chuen and Jacquelyn Yow, who spoke to Mielke at an online seminar yesterday, wrote in a note today that Mielke, however, highlighted that his views might change if rain arrived earlier in Brazil, Argentinian farmers kicked off soybean sales, and that China cut its soybean imports in view of elevated prices.

CPO and soybean oil are substitutes for each other, hence, prices of these commodities have been observed to move in tandem with each other based on their supply and demand dynamics.

"South American soybean production to set tone for global oilseeds and vegoil prices until 1H21. Given the expected disruption to Brazil's soybean production and lack of selling interest from Argentinian farmers, soybean prices in 1H21 are likely to trade higher. On top of that, other competing oilseeds, ie sunflower and rapeseed, have also reported sharp production declines due to the dry weather. If the weather in Brazil remains dry over the next few months, soybean production from Brazil could lose another 6m-8m tonnes," the UOB Kay Hian analysts wrote.

"This will enhance the bullish movement for soybean prices and have a spillover effect on soymeal and other vegetable oil prices. Mr Mielke expects average soybean oil and palm olein prices to average ~US$820/tonne and ~US$730/tonne in January-June 2021 respectively.

"After factoring in better rainfall and some yield recovery from the lack of fertiliser application in 2H18 and 2019, global palm oil production in 2021 is expected to increase by 3.8m tonnes yoy (Indonesia: +3.0m tonnes; Malaysia: +0.3m tonnes). Global palm oil consumption is expected to increase by 1.6m tonnes yoy — factoring in a partial demand recovery from the Covid-19 impact. Having said that, the stock-to-usage ratio for palm oil in 2021 is expected to be flat yoy because the inventory carried forward from end-20 is expected to be lower compared to that from end-19," they said.

UOB Kay Hian maintains its market weight recommendation on the regional plantation sector despite the possibility of better CPO selling prices in the short to medium term compared to the research firm's current assumptions, according to the analysts.

"We maintain our CPO price assumptions of RM2,400/tonne and RM2,350/tonne for 2020 and 2021 respectively.

"Plantation stocks (share prices) might not react to the surge in CPO prices. This is because higher CPO prices do not translate into higher earnings. The earnings should factor in erosion from higher operational costs, sustainability costs and additional taxes as prices move on the uptrend," they said.

On Bursa Malaysia today, CPO for November 2020 traded RM64 higher at RM2,952 a tonne at 3.55pm while prices for December 2020 CPO rose RM75 to RM2,900.