Despite the bearish outlook for crude palm oil (CPO), prices have been getting a boost from a weakening US dollar since last Thursday, even as Intertek Testing Services — an independent cargo surveyor — reported an 8.9% month-on-month drop in Malaysia’s palm oil exports in the first 20 days of March. On the same day, news of the removal of import duties on crude soyabean oil in India, which puts it on a level playing field with CPO, did little to curb the increase in CPO price.The greenback lost the wind in its sails when the US Federal Reserve announced last Wednesday that it would buy up to US$300 billion (RM1.09 trillion) in treasuries as well as hundreds of billions more in mortgage-backed securities in its efforts to revive the moribund US economy. The move sent the US dollar plunging against the euro while crude oil surged above US$50 a barrel. Meanwhile, CPO third month futures inched higher, closing at RM1,985 per tonne on the Bursa Malaysia Derivatives Exchange last Friday. It had opened the week at RM1,932; it then hit a low of RM1,902 on Monday before going on an uptrend on Thursday. The performance of palm oil stocks was mixed. Wilmar International Ltd closed at S$3.22 (RM7.75), or up 6.6% week on week. Sime Darby Bhd rose 4.6% while IOI Corp Bhd and Kuala Lumpur Kepong Bhd declined 1.6% and 3.8% respectively. Will the weak US dollar send investors and speculators rushing to commodities as they did in the last few years before the collapse in the financial markets? Is the uptick in CPO prices sustainable or is it just a flash in the pan? The analysts and market players The Edge spoke to are sceptical about the sustainability of CPO’s price strength and most are mindful of the bearish factors presented at the Palm & Lauric Oils Conference and Exhibition held two weeks ago. At the conference, speakers forecast CPO prices at RM1,400 to RM2,300 for various timeframes within 2009. “What you’re seeing right now is just speculative play and paper trading, which doesn’t reflect the real scenario,” says Jim Teh, a palm oil trader with Interband Group, citing the potentially high level of CPO stocks from Malaysia and Indonesia as a dampener on high CPO price levels. Teh adds that the small number of futures contracts traded shows that only local speculative players are in the market currently while the foreign funds are still absent. Prices may be supported in the immediate term, but largely due to temporary speculative play and not based on demand and supply fundamentals. James Ratnam, investment analyst at TA Securities Holdings Bhd, agrees that ultimately, long-term CPO price sustainability is still largely dictated by fundamental supply and demand outlook. Although currency movement plays a role, it is only one of the factors dictating CPO prices by influencing the price discount between soyabean and CPO. “Historically, CPO prices are negatively correlated with RM/US dollar movement. The reason being a weak ringgit would make CPO more competitive compared with its competing oil, namely soyabean oil. Likewise, a strong ringgit would translate to narrower price discount with soyabean,” he explains. Malaysia’s inventory of CPO continued to decline for the third straight month in February to 1.56 million tonnes from November’s high of 2.27 million tonnes, according to data released by the Malaysian Palm Oil Board. The decline could be attributed to lower CPO production of 1.18 million tonnes in February, which was 10.7% lower than the month before. Exports were strong too, rising 18% from a year ago although it fell 7.2% m-o-m. February’s low production is typical of the oil palm fruit production cycle, currently in its low production season. Planters often cite the 45:55 ratio when talking about the oil palm production cycle, where 45% of the year’s production comes from the first half during the low production period and 55% from the second half in the high production season. Hence, the bearish view of those who believe CPO prices at current levels may not be sustainable once fruit production picks up. Furthermore, CPO’s discount to soyabean oil has been narrowing, eroding CPO’s price attractiveness over that of soyabean oil. An industry player says while the US dollar’s weakness is a bullish factor for CPO, he does not expect a return of the stratospheric price level seen in early 2008, given investors’ risk aversion and the poor global economic outlook. “We must remember that we are still in the midst of a recession and while investors’ risk appetite may be returning, it will be minimal. It (the weak dollar) is not a big bullish factor but it is still positive. However, at the end of the day, it goes back to supply and demand,” he says.For CPO sales done in US dollars, oil producers will have to ask for higher prices, given a weaker dollar. The industry player does not view this as a major deterrent to buyers as long as CPO trades at a discount to soyabean oil. “It is okay as palm oil is still the cheapest oil to produce,” he adds. An analyst with a foreign brokerage house says she is not convinced the dollar weakness will last and prefers to wait for a stronger case in support of the US dollar debasement story to emerge. She says the quantitative easing measures taken by the US government is not the solution to the financial crisis. “Although we have been talking about US dollar debasement for a while, we don’t think quantitative easing is the solution. Our house view is you have to take the toxic assets off the banks and nationalise them. Until then, we’re not convinced that things are hunky dory, it’s just a stopgap measure,” she adds. Given the view on US dollar, she says CPO’s price strength will not be sustained. “It’s just a bear market rally,” she says. At the recently concluded palm oil conference, speaker Dorab Mistry of Godrej International Ltd, said given that the US is a major debtor nation, the dollar must fall, perhaps in late 2009 or 2010. “If and when that happens, we shall all have to scramble to buy commodities and become devotees of that great investment guru Mr Jim Rogers,” he said in jest. Based on what analysts and industry players are saying, the scramble is not likely to happen any time soon.
This article appeared in the Corporate page, The Edge Malaysia, Issue 747, March 23-29, 2009