SDG: CPO Price Assumptions Revised Upward on Biodiesel Mandate, Sector Maintains Neutral Stance

The plantation sector’s outlook remains Neutral, despite an upward revision in Crude Palm Oil (CPO) price assumptions for 2025 and 2026. This adjustment is primarily driven by the anticipated implementation of Indonesia’s B50 biodiesel mandate, which is expected to bolster demand for CPO. However, the sector faces several headwinds, including geopolitical tensions, competitive edible oil pricing, and the inherent volatility of CPO markets.

Performance Review and Price Dynamics

Spot CPO prices have recently rebounded to MYR4,400-4,500 per tonne, up from a low of MYR3,780/tonne in May. This recovery was partly influenced by the postponement of US-China tariff decisions, which initially led to a rally in soybean oil (SBO) prices, and by Indonesia’s continued commitment to its B50 biodiesel mandate. Nonetheless, near-term CPO prices are expected to remain volatile due to the dynamic geopolitical landscape.

A key challenge is the narrowing CPO-SBO price discount, which has seen a significant 55% reduction over the past three weeks. Should SBO prices decline further, this could lead to demand destruction for palm oil, similar to early 2025 when India shifted its buying preference from CPO to SBO, resulting in an 18% year-on-year drop in India’s palm oil imports through August 2025. Furthermore, high global soybean stock/usage ratios, projected to reach a multi-year high of 29.5% in 2026, are expected to exert pressure on both soybean and CPO prices, potentially making CPO less competitive.

Future Outlook and Key Catalysts

The most significant catalyst for CPO prices remains Indonesia’s B50 biodiesel mandate. Despite previous reservations regarding technical issues, funding, and the food versus fuel debate, the market is now operating on the assumption that B50 will be implemented from July 2026 onwards, following successful trials. This is projected to create an additional demand of 2.65 million tonnes of CPO in 2026, an increase that has prompted the upward revision of CPO price assumptions to MYR4,350/tonne for 2025 (from MYR4,100) and MYR4,250/tonne for 2026 (from MYR4,000).

However, the mandate still faces challenges, including unresolved technical issues and questions regarding the necessary expansion of biodiesel production capacity and securing adequate funding. Beyond the mandate, potential shifts in global weather patterns, particularly the 71% chance of a La Niña event developing in the coming months, could significantly impact South American soybean crops. Any adverse weather during the crucial planting season could alter global supply dynamics and, consequently, CPO prices.

Investment Perspective

Despite the improved CPO price direction for 2025 and 2026, the sector’s overall rating remains Neutral. This is because share prices for plantation companies have largely rerated over recent months, already pricing in the anticipated positive movements. Upward adjustments in consensus CPO price forecasts are not expected to significantly re-rate the sector further. The investment bank maintains its focus on specific “Top Picks” within the sector, favoring value plays and situational opportunities driven by new earnings or acquisitions, even as the broader sector is deemed to have priced in current favorable dynamics.