CPO rises as dollar weakens

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KUALA LUMPUR: The rise in crude oil prices and the weakening US dollar have led to a rush for commodities, sending crude palm oil (CPO) prices to a trading high of RM2,051 per tonne yesterday, a level not seen since early this year.

Some fund managers have suggested that the improvement in prices points to a possible bottoming out of commodities as investors seek a safe haven to place their money against possible inflation due to excessive pump-priming by governments.

The recovery in the CPO prices also coincided with a global rally in equities yesterday, with the Kuala Lumpur Composite Index (KLCI) posting a gain of 2.51% or 21.48 points to 878.3.

However, there are a fair number of analysts who feel that CPO’s price gain is only temporary, describing it as  “speculative” and rising in tandem with oil prices.  

“This is a speculative play. The rise is in tandem with crude oil prices and there are no underlying fundamentals at all,” said Jim Teh, an Interband Group palm oil trader. “I expect this speculative play to last one to two weeks.”

As at 6.30pm yesterday, crude oil had trended higher to US$52.78 (RM192.65) per barrel versus US$52.07 last Friday. The greenback weakened marginally to US$0.2746 per ringgit from US$0.2742 last Friday.

CPO for June delivery climbed as high as RM2,051 per tonne on Bursa Malaysia Derivatives Exchange, the highest since early January. The contract closed at RM2,030 per tonne yesterday, or RM45 higher than last Friday’s close.

Citing the absence of underlying supply and demand balances, Teh said India’s scrapping of import tariff on soy oil last week was expected to exert a negative influence on the demand for palm oil going forward.

An analyst with a foreign brokerage house echoed the view, noting that the main factor that led to the rise in CPO prices was the strengthening of crude oil prices.

“The main factor is crude oil ... the coupling effect between the two commodities (crude oil and CPO) is there,” she said. “The softening US dollar is an underlying factor.”

Market players had also cited a farmers’ strike in Argentina as one of the possible causes for the improvement in CPO prices. But the analyst said that although the strike had halted soybean shipments and led to higher CPO prices, the impact was minimal.

“The strike has been going on for some time, and I don’t think it is one of the main factors driving up the price of CPO,” said the analyst.

Argentina’s agricultural unions had, last Saturday, announced a new strike to press demands for lower export taxes on grains and to protest a government plan to channel revenue from soy export duties into a fund for provinces and municipalities, according to news reports.

The protest, the second this year and the seventh since the conflict with President Cristina Fernandez’s government erupted in March 2008, went into effect midnight last Friday and will run until midnight this Friday. During the week, farmers will halt sales of cereals and livestock, agricultural leaders told a press conference.

Thomas Mielke, executive director of the Oil World industry publication, had at the recent Palm & Lauric Oils Conference said the Argentine crisis would have major consequences on the world market as the country was by far the largest exporter of soya meal and oil.

Soybean oil, CPO’s substitute, rose to 33.23 cents a pound at 6.45pm yesterday from 32.25 cents a pound last Friday.

It is worth noting that other commodities have also made some gains recently. The benchmark S&P GSCI index rose 8% last week.

Economists believe that although inflation may not be anywhere near, it is not that far off as governments around the world spend trillions of dollars in stimulus packages to fight recession.

Some commodity analysts believe the wider commodity rally is due to the shift in policy by the US Federal Reserve and not to any change in underlying supply and demand balances, news reports say.

The analysts are sceptical about the sustainability of the current commodity rally.

This article appeared in The Edge Financial Daily, March 24, 2009.