CPO: Dances with bears

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The verdict is out. Crude palm oil (CPO) prices, which enjoyed an excellent run in the first half of last year, are unlikely to repeat the performance this year. At last week’s Palm and Lauric Oils Conference and Exhibition, top palm oil analysts painted a rather bleak picture of the commodity this year. Most analysts appear to agree that CPO will trade between RM1,500 and RM2,300 a tonne this year. Acclaimed analyst and director of Godrej International Ltd, Dorab Mistry, told the conference that tight palm oil stocks over the next few months will lead to a slight rally. Over the next few weeks, CPO futures on the Bursa Malaysia Derivatives exchange may briefly trade up to RM2,000. Over the past few months, CPO prices have been on the rise. Palm production in February fell 10.7% to 1.18 million tonnes from January’s 1.33 million tonnes. Total palm oil stocks were also lower, falling 14.7% to 1.56 million from 1.83 million, according to the Malaysian Palm Oil Board (MPOB). While the drop in supply could very well be the much-needed boost for prices, the rally will be short-lived once palm production enters the high production cycle in August. At best, CPO could briefly touch RM2,100 a tonne, says Mistry. “From August onwards, we shall see a very good uptick in CPO production. I am afraid my prognosis is that CPO futures will only get to RM2,100 a tonne.” “Even if energy prices fall, the CPO price will remain at the RM1,500 to RM1,600 levels,” he adds. The reasons for the less-than-rosy forecast are fairly obvious. During the last six months, the global economy has been ravaged by the crippling effects of the credit squeeze, leading to unprecendented price pressures on the commodity and other markets. Even Asia, which is perceived to be more insulated from the credit crunch, saw a significant slide in industrial output, says LMC International Ltd’s chairman Dr James Fry. “Lest we forget, we’re still in the midst of a recession which is hitting demand for food and crude oil.” Another reason for a fairly bearish price outlook is the absence of investment funds in the commodity market compared with last year.“The massive participation of investment funds in our futures market is no more. Index funds exerted a huge influence in the commodity markets by immobilising supply. Trend-following funds exacerbated the situation by creating new liquid demand. Together, this brought huge power to the bulls,” Mistry explains. Another crucial factor in evaluating edible oils supply in 2009 is the weather. According to published data, weather conditions have improved slightly which means better production in the oilseed and grain-growing areas in the northern hemisphere. As a result, production and supplies could be higher, thus keeping prices low. “This is the time where we can afford to have a weather problem,” quips Mistry.Thomas Mielke, executive director of ISTA Mielke GmbH which publishes Oil World, however, is less bearish on CPO. “The world’s consumers are more dependent on palm oil as food than ever before. With the combined reduction in world production and exports of soyaoil this season, as well as insufficient supplies of other oils and fats, dependence on palm oil will go up,” Mielke says in a pre-recorded televisual presentation at the conference. Mielke adds that low prices of agricultural products have generated adjustments on the supply side. “This is partly obvious from the lower than expected plantings in South America and the reduction of fertiliser application by 15% to 35% by South American farmers. There has been a slowing down of oil palm plantings expansion in Indonesia as well.”Oil World estimates that world palm oil exports will rise by 2.4 million tonnes to 35.2 million tonnes between October 2008 and September 2009. At that level, palm would account for a record 56% of world exports of all the 17 oils and fats, Mielke says. An industry player agrees that demand for palm has been fairly good over the past few months. “Exports and prices have been promising the last few months, but note that is in line with our lower production. As such, the fact that we are heading for a higher production period amid times where global demand does not look all that promising… I feel we have not seen the lows yet,” United Plantations Bhd’s executive director Martin Bek-Nielsen tells The Edge. CPO prices slumped to RM1,390 per tonne in October last year.Bek-Nielsen is not ruling out prices going back to those levels due to the bleak global economic environment. “At the max, I say they (prices) could sustain at RM2,000 a tonne for a short period. Generally, I think we will be trending lower,” he says, “A good price for producers is still RM2,000.”

This article appeared in the Corporate page, The Edge Malaysia, Issue 746, March 16-22, 2009