The CPO INDUSTRY

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The CPO Industry

Optimistic Outlook … dated Oct 2010

The CPO prices are close to rm3000 per tonne level. With CPO on an uptrend, plantation stocks enjoyed a strong flow of funds.

The spike in CPO prices came after the release of a report by the US Department of Agriculture on Oct 8, 2010, which downgraded its forecast of soyabean harvests in North America.

Soyabean output in the US is expected to be lower than projected in Sept 2010 but higher than last year. Rainfall in Aug 2010 failed to boost yields, prompting the government to reduce its acreage estimates.

While weather concerns gave largely driven commodity prices till Oct 2010, market observers say the soyabean supply crunch certainly took the market by surprise as the report changed the outlook for oilseeds for the next six months (Oct 2010 – April 2011).

The report caused soyabean oil prices to jump as concerns over tight supply hit the market. Given that CPO prices move in tandem with soyabean oil prices, things are certainly looking for palm oil, at least in the near term.

CPO prices may be ripe for a further upswing, given the USDA’s downgrade of soyabean crop estimates and the threat to oilseed and edible oil supplies posed by the ongoing. This also coincides with anticipated drop in palm oil yields in 4Q2010 and 1Q2011 due to last years (2009) drought.

An upgrading of CPO prices also led to upgrading the FY2010/FY2012 earnings of all the planters. The PER of big cap planters in Malaysia is at 16 times.

Industry players are bullish about the sector for the next six months (Oct 2010 – April 2011), with a preference for planters with pure CPO play. The stocks will definitely be on uptrend. And should the US carry out its second round of quantitative easing. It will bring liquidity into the market and push prices even higher. But the fundamentals are there to support the share price rallies.

Now (Oct 2010), the tide has turned, plantation stocks in the region are seeing the return of foreign interest.

However, Malaysian plantation stocks may not attract the same kind of attention from foreign investors as they are trading at a premium to their Singapore and Indonesian peers. The PERs of the plantation stocks in Malaysia are in the high teens while those of the Singapore and Indonesian planters are around 13 times to 15 times.

Nonetheless, with the economy picking up and what looks like the start of a strong rally in the plantation stocks, foreign funds looking for exposure in the local index may start considering these counters.

News report say that CPO might rise to RM3600 per tonne by 1Q2011due to potential shortfall in supply. CPO may hit all time high of RM4486 in March 2008. While this level may not be on the horizon. Certain factors will keep CPO prices at a high level.

Strong growth in the emerging markets and an increase in biodiesel mandates will likely boost demand. The upside potential of CPO prices may also be fuelled in the near term by soyabean production risks in South America.

The discount at which CPO is trading to soyabean oil has widened to a historical average of US$120 per tonne, which could also lift demand for CPO in the near term.

Meanwhile Malaysia’s palm oil exports rose by 21.16% to 1.47 million tonnes in September 2010 against the previous month. Year-on-year (yoy), the palm oil export for Sept 2010 reflected a 10.9% climb compared with the same month last year.

Malaysia’s palm oil exports are expected to reach RM65.2bil this year from RM49.5bil in 2009.

Also, the latest monthly statistics for released by the Malaysian Palm Oil Board showed the exports of palm kernel oil increased by 41.44% to 114,224 tonnes, palm kernel cake rose by 95.54% to 252, 749 tonnes and biodiesel advanced 11% to 10,011 tonnes for September 2010 on a month-on-month (m-o-m) basis.

Only oleochemicals exports slid, going down by 7.16% to 170,521 tonnes in September 2010 m-o-m.

But the increase in exports did not entirely correspond with the country’s palm oil inventory where the total palm oil stock in September 2010 marginally increased by 0.23% to 1.71 million tonnes m-o-m. Also, crude palm oil (CPO) stock rose by 18.88% to 929,225 tonnes in September 2010 m-o-m.

But this inventory could be counter balanced by the lower production of palm oil in general that included CPO, palm kernel, crude palm kernel oil and palm kernel cake in September 2010 against the previous month. CPO production went down by 2.72% to 1.56 million tonnes last month against August.

By Murali Krishna PV, CEO of India-based Transgraph Consulting Pvt Ltd … dated Oct 2010

Continued growing demand coupled with lower production and weather factors are expected to lift crude palm oil (CPO) prices to the RM3,300-level in the next four to six months (Oct 2010 & Beyond).He projects the global production of palm oil to decline by 2.41 million tonnes in 2011 while the demand for palm oil is estimated to grow 8% to 10% annually.However the uptrend in CPO would be met with intermittent seasonal corrections due to crop arrival pressure.With the growing per capita income in China and India, demand from these two countries for CPO could reach 37 million tonnes and 26 million tonnes respectively in the next few years (2010 & Beyond). In 2013, there is going to be a major bull run which is already underway.
He expects crude oil to trade on the upside from now (Oct 2010) till March 2011, potentially hitting US$90 a barrel with the downside at US$70. Crude oil could cross the US$100 mark after March 2011.

By CIMB … dated Oct 2010

PALM oil prices are heading towards the RM3,400 mark by the second half of next year (2011) on the back of a bullish run by vegetable oils in the global market,It expects prices to touch RM3,400 per tonne in the first quarter of 2011, but cautioned that it is important to have prices at RM2,800 per tonne in the short term.
Pessimistic Outlook … dated Oct 2010

Factors that may curb the uptrend of crude palm oil (CPO) price in the near term could be the release of higher-than-expected October 2010 production numbers, improved soya bean planting in South America due to better weather conditions, a stronger US dollar or if China revalues its currency, said plantation analysts.

A bearish factor that may hamper the upward movement in CPO price is the release of the October 2010 on Nov 2010 production numbers. An increase in production numbers may see prices cooling. CPO production was 1.56 million tonnes for September against 1.61 million tonnes for August 2010.

The price reversal could take place should there be improved soya bean planting in South America. With improved planting, this may mean a higher consumption of soy oil in the place of palm oil. This might be the case as weather conditions in the United States and South American countries saw further improvement over the next two months (Nov – Dec 2010).

Whether the plantation index will continue upwards will largely depend on the movement of CPO prices.

Meanwhile, should the US dollar strengthen, CPO prices would come off. Commodities, which are priced in the greenback, become less attractive to buyers who use foreign currencies as the dollar strengthens. The rise in all soft commodities is more a function of a weaker US dollar rather than the fundamentals of commodities.

Another consideration will be the outcome of the G20 meeting. Should China look to revalue its currency, then all bets are off”. China has come under external pressure to increase the value of its currency to alleviate pressure on foreign economies by boosting their exports and reducing trade deficits.

Lan Chen, an economist at UK-based LMC International … dated Oct 2010

He disagreed with the bullish outlook for CPO. While CPO prices had generally followed the level of stocks back in the years before 2007 and then tracked the trend of crude oil prices post-2007, recent trends showed that CPO price movements were very much tied to the price of soybean and soybean oil.US soybean oil, which is a direct substitute of CPO, “is more than US$100 (a tonne) overpriced in the US biodiesel market.” This will place downward pressure on soybean oil which in turn will pressurise palm oil prices even more.Additionally, Chen expects MPOB’s stocks of CPO to peak at 2.25 million tonnes next year (2011), without giving a specific timeframe for the estimate. The output will be strong in 2011. In the end, if use today (Oct 2010)’s US dollar exchange rate and petrol price, the CPO price will be RM2,500 to RM2,600.