Fears of lower production of CPO and soyabeans fuelled a rally in CPO futures recently.
For April, Malaysian Palm Oil Board data show declining stock levels and marginal growth in production compared to the month before. The US Department of Agriculture had, on May 12, forecast global soyabean production of 212.8 million tonnes, lower than an earlier forecast of 218.8 million, because of a smaller South American crop.
Dorab Mistry, director of Godrej International Ltd, who had earlier forecast CPO futures to trade between RM1,500 and RM2,100 per tonne this year, turned bullish in Tokyo last Monday. He said futures are expected to exceed RM3,000 per tonne and should El Niño develop, the price levels of early 2008 may be revisited.
Mistry expects Malaysian CPO production to be around 17.5 million tonnes in 2009, 250,000 tonnes lower than in 2008 and 800,000 tonnes lower than the government’s estimate of 18.3 million tonnes. He also lowered Indonesia’s CPO production from 22 million tonnes to 21.5 million tonnes. Mistry expects production to recover from August onwards.
IOI Corp Bhd’s executive chairman Tan Sri Lee Shin Cheng told Reuters two weeks ago that CPO prices may hit RM3,000 in the near term on the back of hot weather, lower oil yields, biological tree stress and lower application of fertilisers.
Palm oil dealers, however, are less bullish on the price direction of CPO futures. They say they doubt prices will hit RM3,000 per tonne. One dealer sees strong resistance at RM2,800 and strong support at RM2,300. The third-month contract closed at RM2,521 last Friday on Bursa Malaysia Derivatives.
“The market has failed to breach the RM2,800 level a number of times. It is factoring in the anticipation of growing production in the second half. Traders are now turning short after liquidating their long positions earlier,” the dealer says, adding that the smaller South American soyabean crop has been factored into the price. Soyabean oil and CPO are substitute oils.
Although the market is not expecting a big jump in production, most dealers believe it is only a matter of time before production picks up again. The word among dealers is that production may increase by 5% to 10% sequentially in May. The dealer notes that numbers up until May 20 from the Southern Peninsular Palm Oil Millers Association show m-o-m growth of 12%.
Crude oil price and US dollar weakness are not seen as major bullish factors for CPO prices. Nevertheless, a weak dollar may have a longer-term impact on CPO as investors buy commodities for the purpose of hedging while high crude oil prices may affect day-to-day trading sentiment in the futures market.
“CPO has already moved way ahead of crude oil and most biodiesel plants are not running. CPO has largely decoupled since the end of last year. This may affect sentiment but it won’t be prolonged,” says Alvin Tai, regional plantation analyst at OSK Research Sdn Bhd.
Another dealer says CPO futures prices have moved up too fast and are due for a correction, albeit a gradual one.
Lower fruit production due to the weather is already being borne out by the results of plantation counters for the quarter ended March 31. Although fruit production is normally lower in the first half of the year, which explains why the performance of plantation companies is usually better in the second half, the results show that production was even lower than a year ago. This was aggravated by lower CPO prices compared to a year ago.
Most plantation companies that have released their financial results for the quarter ended March 31, 2009, are showing y-o-y declines in earnings due to lower fruit production and CPO prices.
Singapore-listed Wilmar International Ltd’s plantation revenue declined 41% in 1QFY2009 from a year ago while profit before tax fell 26.4% due to lower CPO prices. Lower fruit production — down 1.8% y-o-y — was attributed to the 10.9% drop in oil yields to 4.5 tonnes per hectare.
“The drop in yields was caused by the wet weather in various regions in Sumatra and Sarawak which affected harvesting, the after-effects of droughts in Palembang from May to September 2007 and May to July 2008 as well as the dilutive effect on total yield of newly mature hectarage,” Wilmar explained in notes to its financial statement.
It is a similar story at Golden Agri-Resources Ltd, which posted a 93.8% decline in net profit on the back of a 44.8% drop in revenue for 1QFY2009. Again, lower CPO prices and fruit production caused the declines. FFB and CPO production fell 17% y-o-y due to weather-related factors, the company explained.
IOI Corp managed to realise higher average CPO prices in the nine months ended March 31, 2009, of RM2,932 versus RM2,705 a year ago, according to the company’s quarterly financial statement released two weeks ago. This is because IOI Corp had sold forward its CPO production. Analysts estimate the company sold forward up to 90% of its FY2009 crops.
However, IOI registered an unrealised translation loss on its US dollar bonds of RM232.4 million for the quarter and RM482 million for the nine-month period due to the weaker ringgit against the greenback. The company said as the ringgit has been strengthening against the US dollar since March 31, the unrealised translation loss will be written back should the trend continue.
Realised forex losses and customer defaults shrank in 3Q. Total realised forex losses amounted to RM69 million, compared with RM95.9 million and RM100.6 million in 2Q and 1Q respectively. AmResearch Sdn Bhd, in a report, notes that the slide could be due to a slower appreciation of the US dollar against the ringgit. It also believes that most of IOI’s forward contracts closed in 1HFY2009 and hence, most of its realised losses have already been recognised.
OSK Research’s Tai says that forex losses should decline in 4Q as the spread between realised CPO and market prices has been narrowing, which indicates that forward sales are on the decline.
“Forex losses go hand in hand with forward sales,” he adds.
As customer defaults fell, results at IOI’s downstream operation also improved, showing a pre-tax profit of RM109.6 million compared to a pre-tax loss of RM85.3 million in the preceding quarter.
The effects of seasonally lower fruit production and CPO prices are also expected to show up in Sime Darby Bhd’s 3QFY2009 results, which will be released this week. While average selling prices may be higher compared to the preceding quarter, FFB and CPO production was 14.3% and 18.4% lower q-o-q respectively, according to production data filed with Bursa Malaysia. Having said that, lower production and higher CPO prices may offset each other, leading to flat growth on a sequential basis.
A plantation analyst with a bank-backed research house says the impact on profitability differs from company to company, depending on how aggressive they are in their forward selling, in addition to other factors such as the maturity of palms and location of estates.
This article appeared in the Corporate page of The Edge Malaysia, Issue 756, May 25-31, 2009.