IOI Corp sees CPO prices strengthening

This article first appeared in The Edge Financial Daily, on December 5, 2017.

Datuk Lee Yeow Chor. Photo by Patrick Goh

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KUALA LUMPUR: Global integrated and sustainable palm oil player IOI Corp Bhd sees crude palm oil (CPO) prices trending higher at RM2,500 to RM2,650 per tonne in the coming two months.

This is, at most, just 7% higher, compared with the RM2,473.50 per tonne seen as at Nov 30.

“We see a strong support level for CPO prices at RM2,500 to RM2,650 per tonne in the next two months. There is always the seasonal factor whereby at the end of this year and into the beginning of next year, we expect [palm oil] stocks to be at what it is today,” said IOI Corp chief executive officer Datuk Lee Yeow Chor (pic).

“However, going into March [and] onwards, as consumption increases after the winter months, we will see the stocks go down. At that time, we expect prices to move slowly up,” he told reporters after the group’s extraordinary general meeting (EGM) yesterday.

However, Lee noted that CPO prices have dropped substantially in the last three weeks due to unexpectedly more stable oil palm fruit production.

According to Malaysian Palm Oil Board data, CPO prices had fallen 11% from RM2784.50 per tonne on Nov 9 to RM2473.50 per tonne on Nov 30.

“Normally in October, you will see a peak in production and in November, there will be a lowering of production. But this year, we are not seeing that happening. [So,] stocks have increased more than expected, so that [have] resulted in the drop in [CPO] prices.

“Another important factor is the strengthening of the ringgit. Internationally, in US dollars, CPO prices have not dropped that much, but because the ringgit has strengthened in the last few weeks by 3% to 4% against the [US] dollar, this has led to the [bigger] drop in CPO prices,” he said.

The ringgit was at 4.0640 against the greenback yesterday, 4% stronger compared to a month ago, when it was at 4.2315 against the US dollar on Nov 6.

Going forward, the strengthening of crude oil prices is also expected to support CPO prices, Lee said.

“In the past few years, we have seen a correlation between [the movement of crude oil] prices and [CPO prices], as part of palm oil can be used for biodiesel, but this correlation is usually modified by palm oil stocks.

“At present, [though crude oil prices are up], we are not seeing that corresponding increase in [CPO] prices due to stock levels being higher than expected. But we believe eventually, the higher [crude oil] prices will support CPO prices going forward.

“Also, the forward price of CPO has exceeded its current price by RM80 to RM100, so you can see that [the expectation] is that this is a temporary softening of prices, and that going forward, there is more confidence that prices will increase,” he said.

The CPO price for February 2018 contract was at RM2,613 per tonne, up 6% from the current price.

On production levels for IOI Corp, the group has forecast an 8% to 10% year-on-year increase in palm oil production for the financial year ending June 30, 2018 (FY18), partly driven by a recovery from the effects of the El Nino phenomenon, as well as new production from Indonesia.

At the EGM yesterday, 99.9% of IOI Corp shareholders voted in favour of the group’s proposed disposal of its 70% stake in specialty fats player Loders Croklaan Group BV to Koninklijke Bunge BV — a wholly-owned subsidiary of global agribusiness and food company Bunge Ltd — for US$595 million billion plus €297 million, subject to adjustments (equivalent to RM3.95 billion net of adjustments).

IOI intends to use RM1.98 billion from the proceeds for the repayment of borrowings, which would reduce its gearing from 0.78 times as at June 30, 2017 (FY17) to 0.38 times. The group has also earmarked RM1 billion for future investments, mainly for its upstream business.

IOI Corp expects to see an estimated gain of RM2.28 billion from the disposal, consisting of a gain of RM1.6 billion for the sale of a 70% stake, as well as a gain of RM686.6 million from the remeasurement of the group’s remaining 30% stake in Loders.