“If you take cue from plantation stocks, then CPO will likely not move up much anymore. Following a normal trend, prices of plantation stocks usually move before CPO does.

“But for this rally, plantation stocks refused to move higher. So quite likely, the only direction CPO will move next is downwards,” an analyst from OSK Research told The Edge Financial Daily.

Plantation counters closed lower last Friday despite the Kuala Lumpur Composite Index (KLCI) gaining 3.31 points to 1,026.78.

Kuala Lumpur Kepong Bhd fell 20 sen to RM11, while Sime Darby Bhd and Kulim (M) Bhd lost 10 sen each to RM6.50 and RM5.75 respectively. Asiatic Development Bhd and IOI Corporation Bhd fell four sen each to RM4.94 and RM4.36, respectively, and IJM Plantation Bhd dropped two sen to RM2.42.

“Definitely the current CPO price levels have exceeded most people’s expectations. But the current trend is not something that will stay long. This is probably somewhere near the peak already and it will go down from here,” said the OSK analyst, adding that CPO price did not usually sustain at high levels for long and it was a normal trend for it to “swing up and then down”.

CPO has been rising steadily since reaching RM2,019 per tonne late March. Prior to that, it had been trading below RM2,000 per tonne since last October after hitting a high of RM3,747 per tonne in May last year. CPO for July delivery closed RM5 higher at RM2,685 per tonne last Friday.

The OSK analyst said the uptrend this time around was mainly supply-driven with a drop in production in the fourth quarter of 2008 (4Q08) and first quarter of 2009 (1Q09) due to lower output from Indonesia.

He said demand for CPO was still weak and the growth the past few months were mainly from Europe, which downtraded from soybean oil. “But now, there is not much difference between soybean oil and palm oil. So there would be a further decrease in demand,” he said.

Soybean oil traded at 39.13 cents (RM127.74) per pound, up 0.35 cent, for July delivery as of 7pm last Friday.

The analyst added palm oil production may rise up to two million tonnes in the second half (2H) of this year, which would put further pressure on CPO price.

“1H will be much lower year-on-year. But the surge in production for 2H will be quite big. It is quite uncertain where the CPO will head. It may trade below the RM2,000 level in the later part of the year,” he said.

Meanwhile, another analyst from a bank-backed research house said there would likely be correction to CPO prices come June.

“The high price now is mainly due to speculative activities and short trading. There is big trading volume for this month but it will wind down once short covering is over and there is less speculative volume.

She added there was still much uncertainty over the future of soybean, an “almost the perfect substitute” for palm oil, as US only announced its planting plans and the actual supply from US had yet to be determined.

“But fundamentally, CPO tend to trend downwards in the second half although there is a lot more difference (in the economic landscape) this year, so it is not as clear to see where it is heading.

“It will likely fall to the range of about RM2,200 to RM2,400 per tonne in the third quarter,” she said.

This article appeared in The Edge Financial Daily, May 11, 2009.