The latest production and stockpile figures released by the Malaysian Palm Oil Board (MPOB) seem to have reinforced the bullish view of crude palm oil (CPO).
Lower production and inventory levels helped prop up CPO futures prices which were coming off their recent peak of RM2,565 per tonne. “Prices recovered from a low, rising above RM2,500 after the MPOB’s rather friendly numbers,” says Ryan Long, a palm oil futures dealer at OSK Investment Bank Bhd.
According to the MPOB, stock levels fell a marginal 2% to 1.93 million tonnes from 1.97 million tonnes in October while production declined by a higher-than-expected 19.6% to 1.6 million tonnes because heavy rains affected the harvest of fresh fruit bunches. Meanwhile, exports increased a marginal 1.45%.
The market had expected stock levels to reach two million tonnes in November — the seasonally high production period —but this was not the case. Dorab Mistry of Godrej International had said in September that CPO inventory in Malaysia may rise to more than two million tonnes by end-November. Last year, stock levels had peaked at 2.2 million tonnes in November.
Analysts and price forecasters have turned increasingly bullish on CPO prices and the palm oil sector. At the Indonesian Palm Oil Conference, Mistry reinforced his bullish view and upgraded his CPO price forecast from RM2,400 per tonne to RM2,800 to RM3,000 by January 2010 due to a disruption in supplies from Malaysia, arising from tree stress, the El Niño phenomenon and a replanting incentive scheme that expires in March 2010.
The prices of CPO futures have climbed steadily since a correction between August and October. The three-month contracts once fell to a low of RM1,750 in the first quarter of the year. Last Friday’s closing price was RM2,537.
Oil World’s publisher Thomas Mielke was also optimistic about CPO prices in 1H2010, although he predicted softer prices in the near term due to high stock levels in Malaysia and Indonesia. Dr James Fry of LMC International, an agriculture consultancy based in London, said prices may hit RM3,200 a tonne by June next year as stocks decline and crude oil rises, making palm oil-based biofuels more attractive.
Optimism is palpable among brokers and bankers alike. Standard Chartered, in its 2010 Global Focus, says the correction in CPO prices has been overdone. It expects Indian demand to firm in 2010 and inventories in Malaysia and Indonesia to tighten as a result of strong exports and weather disruptions to production in 1Q2010. Higher energy prices leading to rising global use of CPO as feedstock for biodiesel will also lend support.
“We look for a price rally towards a target of RM3,150 per tonne in 2H2010,” it says.
Meanwhile, CIMB Research expects a rally in CPO prices in 1Q2010 on Chinese New Year demand, global economic recovery, higher biofuel mandates as well as possible lower supplies due to biological tree stress.
CLSA Asia Pacific Markets, in a report dated Dec 7, reiterates its “overweight” recommendation on the sector, citing bullish supply-demand fundamentals as palm oil production drops to a seasonal low in the first half, lower than expected soyabean planting in South America and demand from China and India.
China, the world’s largest consumer of vegetable oil, has been building its state reserves. According to the US Department of Agriculture (USDA), China’s consumption of soyabean is estimated at more than 54 million tonnes in 2009 while the country produces only 14.5 million tonnes.
The USDA crop report, which was out last Thursday, trimmed its soyabean inventory forecast for next year’s harvest by 5.6% due to strong exports of the oilseed. Its forecast of 255 million bushels in stockpiles is higher than the market’s expectation of 235 million bushels. Meanwhile, the USDA is projecting world soyabean production of 250.3 million tonnes — almost unchanged from its 250.2 million tonne forecast last month — but higher than last year’s production of 210.9 million tonnes.
CPO and soyabean oil are positively related as both are competing oils. CPO trades at a discount to soyabean oil. The harvesting of soyabean in the US, the world’s largest producer, has been completed, with Oil World estimating a larger harvest than in 2008. However, it cut its production forecast for Argentina due to dry weather in major soyabean growing areas.
Wet weather in October during the soyabean harvesting season in the US was a bullish factor and the weak US dollar fuelled the uptrend in soyabean prices. A weak US dollar makes it cheaper for foreign buyers of US commodities. The rally in crude oil prices to more than US$80 per barrel also lent support to soyabean and corn prices due to their usage in biofuel production.
Indeed, the CPO market is subject to various factors, making it both volatile and unpredictable.
“Markets should stabilise after touching RM2,600 per tonne while we wait for new clues to come in,” says OSK Research’s Long.
In 1Q2010, however, he expects the outlook for CPO to remain positive as palm oil stocks in the country dwindle.
Long doubts prices will exceed RM3,000 per tonne in the near term. “Unlike a year or two ago, when destination markets had low stock levels, the scenario has changed now. The panic factor won’t be there as India and China have sizeable reserves,” he explains.
In view of the firm CPO prices, plantation stocks are on many analysts’ recommendation list amidst expectation of upside surprise in earnings.
However, some analysts feel the bullish view of CPO’s price trend does not warrant “buy” recommendations on local plantation stocks, which, some of them say, are rather expensive compared with their peers in the region.
ECM Libra downgraded the sector to “neutral” from “overweight” in November. In its latest report, it maintains its view that plantation stocks under its coverage look expensive in terms of valuation.
CIMB Research and HwangDBS Vickers, meanwhile, maintain their preference for plantation stocks in Singapore and Jakarta.
This article appeared in Corporate page of The Edge Malaysia, Issue 785, Dec 14 – 20, 2009.