Palm oil price increase: Growth moment of CPO issuers

This article has been translated by PwC Indonesia as part of our Plantation News Highlights service. PwC Indonesia has not checked the accuracy of, and accepts no responsibility for the content.

Bisnis Indonesia

23 February 2023

By: Iim F. Timorria

Jakarta - The recent trend of rising crude palm oil (CPO) price provided a positive sentiment for issuers in the oil palm plantation sector. High selling price and strong demand ahead of Ramadan are positive momentum to spur financial performance in the first half of 2023. 

CPO futures for May 2023 delivery on the Malaysia Derivatives Exchange rose 51 points to 4,192 ringgit per tonne as of 4:22 pm local time on Wednesday (22/2). The CPO price had reached its highest daily level since 4 January 2023 on Monday (20/2) at 4,202 ringgit per tonne. 

Indonesia’s latest policy is one of the reasons for the price hike of the most-consumed vegetable oil. The government decided to withhold a portion of the export quota until the end of Ramadan to ensure adequate supply in the domestic market. On the other hand, the volume of palm oil for biodiesel needs also increased in line with the implementation of the B35 policy. 

Amid this sentiment, TP Rachmat’s plantation issuer, PT Dharma Satya Nusantara Tbk (DSNG), estimates that crude palm oil production would increase by 10% in 2023 compared to 2022. 

DSNG’s CPO production volume in 2022 reached 639,480 tonnes, an increase of 17.5% compared to 2021 at 544,280 tonnes. This increase in production was followed by sales growth of 17.4% year-on-year (YoY) from 544,815 tonnes in 2021 to 639,518 tonnes in 2022. 

“The CPO production target in 2023 is up 10% compared to 2022,” wrote DSNG management in a written answer to Bisnis on Wednesday (22/2). 

Amid the current price trend, the management said that it has no plans to expand the plantation area whether through planting in new areas or acquisition. 

“Throughout 2022, our FFB production continued to show an increasing trend with the highest production achieved in the fourth quarter. We are optimistic that 2023 production would also improve from 2022,” said Dharma Satya Nusantara’s President Director Andrianto Oetomo, recently. 

However, DSNG still anticipates the potential impact of heavy rainfall in 2023 which could affect the extraction rate and Free Fatty Acid (FFA) level. 

Separately, PT Astra Agro Lestari Tbk (AALI) estimates the growth of crude palm oil production in 2023 at around 5%. 

Astra Agro Lestari Santosa’s President Director Santosa said that the majority or around 55% of the company’s production comes from external fruit, both plasma and independent smallholder plantations. According to him, rainfall and the plants’ age greatly affect the company’s production. 

“Our capex ranges from Rp1.5 trillion to Rp1.7 trillion. This is still not final,” said Santosa last weekend. 

According to Santosa, 50%-70% of AALI’s capital expenditure is for immature plants. Meanwhile, the capex figure will depend on fertiliser price fluctuations. 

Stable CPO price serves as a capital for palm oil companies to increase capacity, including by exploring the acquisition of plantations. One of them is PT Sumber Tani Agung Resources Tbk (STAA). 

Sumber Tani Agung Resources’ President Director Mosfly Ang said that STAA had acquired around 6,000 hectares (ha) of oil palm plantations in 2022. The acquisition cost up to Rp306 billion and expanded STAA’s total planted area to 48,000 ha. 

“In 2023, one of our focuses, apart from completing downstream facilities, is to increase the plantation area. We will make acquisitions and we are currently reviewing which ones we can realise. This is to support inorganic growth,” said Mosfly on Tuesday (21/2).

Mosfly is optimistic that CPO price would be more stable and has the potential to strengthen in 2023 considering tight supply and demand condition.

“As long as production costs are low, we are not worried about the price volatility that occurs,” he said.

Room for expansion

NH Korindo Sekuritas analyst Cindy Alicia Ramadhania said the increase in CPO price is in line with the strengthening of global crude oil and vegetable oil prices. The sentiment of demand recovery from the domestic market and China also influenced price movements. 

Demand for palm oil that remains strong has the potential to encourage issuers to increase production capacity. Cindy said the opportunity to acquire plantations or expand the area would potentially continue because palm oil issuers have robust financial capital after benefitting from high selling price in 2022. 

“With the increasing demand for CPO, certainly there is a chance for CPO issuers to expand their plantation area to increase production and meet supply requirement, so that their financial performance would be leveraged as well. In any case, this sector is strongly affected by supply and demand,” said Cindy on Wednesday (22/2). 

Oil palm plantation issuers generally also reap profit ahead of Ramadan. Although it only lasts for a month, the demand for palm oil products in general rises along with increased consumption. 

“Although for exports there is a sentiment on export quota implementation, I believe domestic sentiment can contribute to CPO demand,” she said. 

Cindy currently gives buy recommendation for AALI with a target price of Rp11,000. Meanwhile, Phintraco Sekuritas Equity Research Analyst Alrich Paskalis gives buy on support recommendation for several issuers in this sector. Among them are AALI with a target price of Rp8,600-Rp8,825, TAPG with a target price of Rp655-Rp695, and SSMS with a target of Rp1,635.

Historically, said Alrich, consumption of palm oil products increases approaching Ramadan, especially for cooking oil. The potential increase in demand is also evident from the domestic supply guarantee policy.

“Indonesia as one of the largest CPO consumers also implemented B35 earlier this year. So, there is optimism that rising demand will be followed by improved performance of plantation issuers,” said Alrich.