Oversupply situation of oleochemical products

PETALING JAYA: Plantation companies with downstream operations, particularly in oleochemicals, will likely be hit by slow global demand due to oversupply factors as well as increasing competition from Indonesia and China exporters this year.

AmInvestment Bank (AmInvest) Research, in a report, said challenging times are ahead for oleochemicals players, despite the three-month pause in US tariffs which allowed customers to stock up their inventory.

The research house, which downgraded the plantation sector to “neutral” from “overweight” had said it preferred pure planters to the large integrated companies.

As such, AmInvest Research has downgraded Kuala Lumpur Kepong Bhd (KLK) and IOI Corp Bhd to a “hold” call with new target prices (TPs) at RM21.71 and RM4.05 respectively.

However, it has kept a “buy” on Genting Plantations Bhd (TP: RM5.84), Johor Plantations Group Bhd (TP: RM1.67) and TSH Resources Bhd (TP: RM1.38).

The research house has also reduced the price earnings (PE) assumptions and net profit of the large integrated plantation companies.

“We have lowered the net profit of KLK, IOI and SD Guthrie Bhd by 5% to 10% to account for weaker downstream revenue and earnings before income tax margins,” it added.

AmInvest Research said the downstream revenue of the three companies fell between 13% and 20% in 2023, after soaring in 2022 on higher selling prices and customers’ purchases.

“We believe that selling prices of oleochemical products such as fatty acids and fatty alcohols, would be under pressure in the second half of 2025 (2H25),” it said.

Furthermore, customers in Europe and Asia might delay or halt orders due to the tariffs and economic uncertainties.

“We have also reduced our PE assumptions as the market de-rates due to the tariffs,” it noted.

AmInvest Research expected crude palm oil (CPO) prices to be supported by purchases from China and India.

“If CPO prices fall below RM4,000 per tonne, we believe that China and India would step up purchases,” it said.

“We reckon that CPO prices would be supported by China’s purchases in 2H25 as the country replenishes its reserves, resilient US soybean oil prices as the United States may raise its biodiesel blending mandate and unexciting production of CPO in Malaysia and Indonesia,” it added.

As such, the it maintained its 2025 average CPO price assumption of RM4,250 per tonne for the pure Malaysian planters and RM3,950 per tonne for those planters with Indonesia exposure, for now.

Year-to-date, the average spot CPO price is RM4,492 per tonne.

Meanwhile, AmInvest Research said the selling prices of oleochemical products would come under pressure due to oversupply and weak global demand.

Competition from Indonesia is expected to intensify as the republic exports most of its oleochemical products to the United States.

Indonesia is the world’s largest producer of oleochemical products with production capacity of over 23 million tonnes per year while Malaysia’s oleochemical production capacity is about 2.6 million tonnes annually.

Apart from Indonesia, Malaysian oleochemical companies would also be facing competition from China as demand in the republic slows down.

China’s oleochemical production capacity is estimated to be more than five million tonnes per year.

Indonesia and Malaysian companies with oleochemical operations in China are raising capacity, including KLK which is expanding its plant in Zhangjiagang, Suzhou to 500,000 tonnes per year, Wilmar International Ltd (1.5 million tonnes per year) and Apical Oleochemical (600,000 tonnes per year).

On the other hand, China may step up on its palm oil purchases as it reduces imports of US soybeans.

“As US soybeans would be pricier, we believe that China would be buying more soybeans from Brazil and palm oil from Indonesia and Malaysia. We reckon that most of the purchases will take place in 2H25 as currently, China may still have sufficient reserves,” AmInvest Research added.