KUALA LUMPUR (Feb 15): The effects of El Nino may offer a situational play in plantation counters as a sharp decline in inventories is expected to lift crude palm oil (CPO) prices between March and May this year, said analysts.

The anticipation of higher CPO prices shore up interest on plantation stocks, with United Plantations Bhd and Kuala Lumpur Kepong Bhd among the top gainers in the morning session today. By the close of morning session, both stocks settled at RM25.50 and RM23.58, up 50 sen and 40 sen respectively.

According to a Maybank Kim Eng report today, the three-month CPO price broke RM2,600 per tonne last Friday and closed at a 21-month high of RM2,639 per tonne on El Nino induced CPO price rally to compensate for lower fresh fruit bunch (FFB) yield.

"On a blue-sky scenario, CPO price may even hit RM2,900 per tonne assuming CPO price trades at parity to US soyoil price," Maybank's plantation analyst Ong Chee Ting said.

However, Ong highlighted that he would turn caution towards August, anticipating sharp CPO price correction sometime in the second half of 2016 in view of seasonally peak CPO production period and end of the El Nino effect.

Other factors that may have augured well to plantation sector recently included January stockpile, which fell to the lowest in six months, and lower expectation of Feb stockpile.

The Malaysian Palm Oil Board's January 2016 inventory recorded a second consecutive month-on-month (m-o-m) decline, decreased by 12% m-o-m to 2.31 million metric tonnes (mt), after reaching an all-time high of 2.91 million mt in Nov 2015. This was due to a seasonally weaker January CPO production compounded by 2015's El Nino lagged effect on FFB yield.

According to the report, the lower output more than offset seasonally weaker exports, which dropped 14% m-o-m to 1.3 million mt. Such sharp decline in inventories has lifted CPO spot price by approximately RM200 per tonne over the past month.

Ong expects February's stockpile to drop to about 2 million to 2.1 million tonnes.

While independent cargo surveyors Intertek and SGS indicate a sharp 23% and 39% m-o-m decline in Malaysia's export to 250,000 or 200,000 tonnes, Ong said these estimates could be skewed by the long Chinese New Year weekend celebration during the period.

On Malaysia's CPO export duty, which has surprisingly been deferred to April, Ong believes the government intends to encourage CPO exports given the relatively high CPO stockpile.

"Nonetheless, at the current CPO spot price of RM2,420 per tonne, Malaysia will surely resume its export tax collection on CPO this April. The re-introduction of export taxes will help Malaysian refiners raise a bit of its competitiveness vis-à-vis Indonesian refiners," Ong said.

Ong maintains a "neutral" view on the plantation sector, yet he advocates a trading strategy in the first half of 2016 as El Nino offers a situational play.

He recommends investors to buy on sector bellwethers such as IOI Corp Bhd, Ta Ann Holdings Bhd, Sarawak Oil Palms Bhd. But he has a "sell" call on Felda Global Ventures Holdings Bhd for its high cost base and further cost pressures from the new minimum wage in July 2016.