"There is still no upside potential in the near term for this sector, and we would advise investors to stay on the sidelines for now until there is better guidance as to the direction of CPO (crude palm oil) price movement.
"We think that the current price level of above RM2,000 per tonne is unsustainable as this price is being supported by production shortfall in Indonesia," said Alvin Tai, a plantation sector analyst from OSK Research.
In the latest research report, OSK said the shortfall in supply led to inventory declining faster than expected, with Feb 2009 inventories dropping to only 1.56 million tonnes or a 14.7% decline month-on-month (m-o-m).
The lower-than-expected inventory was mainly due to lower production, which fell by 10.7% and higher domestic consumption that went up by 31.9% m-o-m despite weaker exports, which declined 7.2% on a monthly basis.
Tai said the research house was keeping its projection of CPO prices to hover at between RM1,500 and RM2,100 per tonne. The closing price yesterday was RM2,011 per tonne, down RM11 or 0.54% from last Friday.
Another industry observer from a local research house said the focus was now on the demand side of the equation, where recovery in prices was not expected anytime soon.
"There are signs that while palm oil demand for food production is holding up, industrial use of the commodity is still sluggish," he said.
OSK's Tai remained concerned that palm oil prices could come under pressure when Indonesia's production recovered, which could be as early as second quarter (2Q09) of this year.
Moreover, Malaysian production should be exiting its seasonal low next month. The speed of mandatory biodiesel implementation holds the key to preventing a collapse in palm oil prices.
According to Tai, the research house is maintaining a neutral weighting on the plantation sector. The top picks among the big-cap plantation players are IOI Corporation Bhd as it is the most liquid and cash rich among its peers.
Kuala Lumpur Kepong Bhd (KLK) stands to benefit the most when the situation recovers as it has the strongest production growth among the big players.
OSK also preferred Hap Seng Plantations Bhd among smaller players and remained bearish on Sime Darby Bhd, as the group is seen as too diversified and plantation operation and earnings too diluted at group level.
At the end of yesterday's trade, Hap Seng was unchanged at RM1.64, while IOI Corp fell six sen to end at RM3.74.
KLK slipped10 sen to RM10.30 but Asiatic Development Bhd rose six sen to RM4.04. Sime Darby was unchanged at RM5.40.