SDG: Plantation Sector Maintains Neutral Rating Amidst Geopolitical Volatility

The plantation sector continues to navigate a complex landscape characterized by sustained geopolitical tensions in the Middle East, which present a multi-faceted impact on global palm oil (PO) markets. Despite a volatile environment, analysts are maintaining a neutral sector weighting, citing both positive and negative influences on supply, demand, and costs.

Performance Review and Market Dynamics

Recent data from Malaysia indicates a notable moderation in Crude Palm Oil (CPO) inventory levels. February 2026 saw a 3.9% month-on-month (MoM) decrease in inventory to 2.7 million tonnes, although this represents a significant 79.1% year-on-year (YoY) increase. The annualised stock-to-usage ratio also improved slightly to 13.4% in February from 14.0% in January 2026, though it remains above the 15-year historical average of 10%. Production in Malaysia experienced an 18.5% MoM decline in February, while exports fell by 22.48% MoM, attributed largely to seasonal factors and comfortable stock levels in importing countries.

A key positive impact stems from the spike in crude oil prices, which have risen over 30% since the Middle East conflict began. This has propelled CPO prices up by 11.6% in the same period, strengthening the correlation between crude oil and CPO to 0.92x. The narrowed palm oil-gasoil (POGO) spread, now at USD19.95 per barrel (bbl) from USD52/bbl, makes funding for Indonesia’s B50 biodiesel mandate more viable. This could incentivise an earlier implementation of the B50 mandate, potentially withdrawing an additional 4 million tonnes of PO supply from the global market. Furthermore, there’s a possibility of 3 million tonnes per annum of non-discretionary biodiesel demand returning if the POGO spread turns negative.

Challenges and Future Outlook

On the downside, concerns persist regarding PO demand, which could be negatively affected by the closure of shipping routes in the war zone. Estimates suggest that up to 15% of global PO demand could be impacted if the conflict prolongs. Additionally, the sector faces increasing logistics costs, which have already reached all-time highs due to elevated freight and war risk insurance premiums. Fertiliser costs, comprising 20-30% of total palm oil production expenses, also pose a significant risk, although most planters have secured their 1H26 requirements, deferring potential impact to 2H26.

Despite these headwinds, the sector’s CPO price assumptions of MYR4,250 per tonne for 2026 and MYR4,100 per tonne for 2027 remain unchanged, reflecting the ongoing volatility. Analysts maintain their neutral sector weighting, acknowledging that CPO prices could fall rapidly if the geopolitical situation stabilises, similar to the market adjustments observed in 2022. Top picks within the sector include Johor Plantations Group (JPG), SD Guthrie (SDG), Sarawak Oil Palms (SOP), IOI Corp (IOI), PP London Sumatra Indonesia (LSIP), and First Resources (FR).

This article provides a general overview based on a sector update and does not constitute a specific company rating or recommendation.