The Bursa Malaysia Plantation Index outperformed the broader market in the last quarter of 2024, led by laggard plantation stocks that were trading at relatively cheap valuations. Indeed, even after the big gains, stocks like United Plantations remain modestly priced compared to their peers. The recent rally was driven by the surge in crude palm oil (CPO) prices in the last quarter, due to a combination of factors that included renewed strength in the US dollar, adverse weather conditions (heavy rainfall and flooding affecting production) as well as, we think, speculative interests ahead of Indonesia’s B40 biodiesel programme (slated to go into effect this month). Notably, prices of soybean oil — the main substitute for palm oil — did not rise in tandem, though prices for sunflower oil and rapeseed oil rose, also due to weather-related supply constraints.
CPO prices surged above RM5,200 per tonne in November 2024 but have since declined. Still, the prevailing prices of around RM4,400 per tonne are higher than they were at this time last year (about RM3,700 per tonne) (see Chart 1). In fact, the data shows a broad uptrend in CPO prices (in ringgit terms) over the past few decades, driven by rising global edible oil prices as well as the ringgit’s depreciation against the greenback. We think the current higher CPO prices are sustainable and we will explain why in the next few paragraphs, though we could see more volatile prices in the shorter term.
CPO is now trading at a premium to soybean oil, which is contrary to historical norms. The large premium is unlikely to be sustainable as the substitution effect kicks in. That said, we also think CPO’s historical discount to soybean oil prices could disappear over time. Like every other market, prices are determined by supply and demand. And for CPO, it has been primarily an Indonesian story for the past decade.
Oil palm cultivation in Indonesia, the world’s largest producer of CPO, has slowed significantly from the earlier years after the government introduced a moratorium on new concessions in primary forests and peatlands in 2018 to address global environmental concerns (see Table). That has slowed output growth.
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At the same time, the Indonesian government has aggressively promoted the use of biodiesel in the country, primarily to reduce reliance on imported fossil fuels, transition to renewable energy and introduce a dependable and sustained source of domestic demand for CPO. The latter is aimed at stabilising CPO prices.
The first mandatory biodiesel blend, B2.5 (2.5% biodiesel) was introduced in 2006 and gradually raised in the ensuing years, for instance to B15 in 2015 and B30 in 2020. The current B35 mandate is set to rise to 40% biodiesel blend this month, and planned to further increase to 50% in the next year or two. According to Reuters reports, state energy firm PT Pertamina, which operates the country’s largest petrol station network, and biodiesel producers group APROBI are just waiting for the relevant official decrees to start selling. These policies in combination mean Indonesia is exporting relatively less CPO to meet growing global demand (see Chart 2).
Meanwhile, Malaysia’s CPO production too has stagnated: in the absence of major new oil palm cultivation, annual output has been lower every year compared to that in 2013, save for 2018. We have limited suitable land and availability (due to competing uses for development) and like Indonesia, USDA there are environmental and sustainability concerns as well as issues like the growing labour shortage and rising costs (see Charts 3 and 4).
To curb deforestation, the aim is to replant rather than expand oil palm’s total planted area. However, replanting in the world’s two largest CPO producers has not quite gone as planned. Oil palm trees in both countries are ageing rapidly and yields are declining while replanting has been slow. In Indonesia, yield per hectare has fallen since 2020 while that in Malaysia has been in decline for far longer, since hitting a peak in 2007 (see Chart 5). Ominously, the Malaysian Palm Oil Board has warned that over one-third of the country’s planted area could be classified as old by 2027.
Notably, replanting has been slow not only among smallholders that make up a material percentage in both total planted area (about 26% in Malaysia and 40% in Indonesia) and output — where, for many, the high replanting costs are often prohibitive — but also for larger plantation companies. We think there are several reasons for this.
The gestation period of oil palm is long — trees only start producing at ages around three or four years old and do not reach their prime until their seventh year. The high upfront (for seedlings, land preparation, labour and planting) and maintenance (fertiliser, pest control, labour and such) costs during the first few years with no fruit to sell, coupled with volatile short-term prices, translate into heightened uncertainties and risks for smallholders.
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Most, and that includes even the larger plantations, are loath to replant when prices are high. Replanting is often deferred to maximise profits, since high prices may or may not be sustainable. As the saying goes, you make hay while the sun shines. And when prices fall, cash flow becomes tight. With future price rebound uncertain, many will choose — or be forced — to hunker down and conserve cash. The point is, in both high and low price scenarios, replanting gets delayed. This is in contrast to, say, soybean, which has a short planting cycle and farmers can react to price changes quickly, planting more acreage to capitalise on high prices and vice versa.
We suspect the generational changing of the guard is another key factor. The younger generation — be it small owners or larger family-controlled companies — has a different perspective on the plantation business. As we said, plantation has very long gestation and payback periods and unpredictable future incomes, especially for smallholders, due to volatile commodity prices. It is not “exciting” like the tech or financial sectors and most young people prefer a more flexible, urban lifestyle and white-collar jobs. Additionally, there are increasing uncertainties on the longer-term CPO demand outlook given the intense scrutiny and pressure from ESG activists. Managements of companies sitting on old planted land near urban centres often prefer to convert their land for higher-value property development projects rather than replant old trees.
All of the above have translated into rather flattish CPO stocks globally in recent years amid steady demand growth — and therefore, relatively smaller buffer against any unforeseen short-term supply constraints, for instance, poor harvest due to adverse weather conditions. And this quite likely contributed to — and will likely continue to cause — the outsized fluctuations (and speculations) in prices such as what we saw in 4Q2024.
The Malaysian Portfolio gained 0.4% for the week ended Jan 8, outperforming the benchmark FBM KLCI, which fell 1.7%. Gamuda (+9.5%), KSL Holdings (+1.7%) and United Plantations (+1.0%) were the top gainers; while the biggest losers were Insas Bhd - Warrants C (-6.9%), Kim Loong Resources (-3.6%) and IOI Properties Group (-1.8%). Last week’s gains boosted total portfolio returns to 206.2% since inception. This portfolio is outperforming the benchmark index, which is down 11.7% over the same period, by a long, long way.
The Absolute Returns Portfolio ended the week marginally lower, down 0.2% and paring total returns since inception to 16.8%. The top gainers were Talen Energy (+7%), OCBC (+5%) and CrowdStrike (+4.8%). On the other hand, shares for Palantir were down 9.8%, giving back some of its recent gains on profit-taking. MAP Aktif Adiperkasa (-5%) and Swire Properties (-3.9%) were the other notable losers last week.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
