Fears of weaker China demand for palm oil products temporary: Affin Hwang

PETALING JAYA: Affin Hwang Capital said fears that China could potentially buy less palm oil products due to the novel coronavirus outbreak are temporary.

Malaysian CPO prices have remained above RM2,900/metric ton (MT) for most of January 2020, but it plunged to RM2,640/MT on Jan 28, mainly due to fears attributable to the coronavirus outbreak’s impact on China’s demand for palm oil products.

“We believe the weakness could be temporary and we think CPO prices would potentially recover due to the expectation of tightness in the supply situation of the 8 vegetable oils, especially for the first half of the year. Overall, we maintain our CPO average selling price assumptions at RM2,500/MT-RM2,600/MT for 2020-21,” it said.

It believes China will still be a major buyer of Malaysian palm oil products, with the ongoing promotional activities and mutually agreed trade agreements between China and Malaysia, such as the revived East Coast Rail Link project that includes a commitment from China to buy more Malaysian palm oil products.

Meanwhile, Affin Hwang said the impact of the signing of the Phase One deal between the US and China will not have severe impact.

Under the deal, China will have to buy an additional US$12.5 billion/US$19.5 billion worth of agricultural goods in 2020/2021, over the 2017 level of US$24 billion (RM99 billion), which has drawn concern that it could impact Malaysia’s palm oil exports to China.

However, the research house said there are a number of factors for why the expected effect from the trade deal will be subdued.

“We expect the African swine flu situation in China to continue to weigh down demand for soybean meal; the trade deal appears a tall order judging by historical import patterns; the ongoing commitment between Malaysia and China should ensure a stable relationship; and Malaysia is switching its palm oil exports to other markets,” it said.

Affin Hwang is maintaining its overweight call on the sector, with Kuala Lumpur Kepong Bhd and Ta Ann Holdings Bhd its top picks.

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