RHB cites the US National Oceanic Atmospheric Association, which has issued an El Nino advisory, predicting it to intensify to a moderate or strong level. In terms of strength, the probability of a strong El Nino peaks at 88% for the November 2026-January 2027 period.
Palm oil output is affected negatively by El Nino and this impact can last for as long as two years, depending on the severity of weather changes, notes RHB. It shares that crop yields usually decline between 2% and 20% due to El Nino.
RHB notes that during the two strong El Nino episodes in 1997-1998 and 2015-2016, there was a one-year lag in yield decreases with 1998-1999 experiencing a 17% decline and 2016-2017’s yield dropping 14%.
With supply constraints, the price of crude palm oil (CPO) rises by as much as 21% during the El Nino years and by an additional average of 26% one year after El Nino, states RHB, implying upside risk to its forecasted CPO prices of RM4,400 per tonne for 2026 and RM4,300 for 2027. However, RHB remains committed to keeping its price projections for now.
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RHB is also monitoring the impact of Indonesia’s natural resources export governance scheme on CPO prices. Under the scheme, all export transactions will be channelled through Danantara Sumberdaya Indonesia with an implementation deadline of Dec 31.
RHB expects some front loading of exports out of Indonesia in the initial transition phase. However, once implemented, there could be export delays from Indonesia, leading to tighter supply and higher prices.
The scheme could also lead to higher costs of compliance for exporters, but RHB thinks costs can be passed through or offset by higher CPO price.
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Based on the afore-mentioned variables, RHB maintains its previous target price of $3.70, but upgrades rating to “buy” from "neutral". RHB highlights that every RM100 per tonne change in CPO price affects the firm’s earnings by 6-8%.
Shares in First Resources are trading at $3.16, down one cent or 0.3%, at around 10.20am on June 22.
