THE price of crude palm oil (CPO) should be able to maintain at the RM3,100 level, according to Malaysian Palm Oil Council (MPOC) and Rabobank. On the other hand, CIMB Research’s forecast is RM2,970 for 2012. The price of CPO yesterday was RM3,065 a tonne.
MPOC chief executive officer Tan Sri Dr Yusuf Basiron says palm oil prices can sustain at the RM3,100 level due to a shortage in production in Malaysia.
He says CPO prices should go up as supply is lower. However, it is no longer subject solely to supply and demand but also petrol prices.
In his presentation in a public lecture, he notes that CPO prices have been following the price trend of petroleum since 2009. The prices of vegetable oils trade higher relative to petroleum and the price trends are similar.
He says the price stabilisation strategy for palm oil is to be able to support future remunerative price levels through replanting to remove excess supply and burning as biofuel to increase demand.
“The price of CPO is fluid. It is affected by the duty structure (in Indonesia) as we are reducing price to compete with each other,” he says.
The Government is in bilateral talks with Indonesia’s corresponding party regarding CPO which has been affected by the competitive price posed by Indonesia’s duty structure.
The Indonesian government imposed an export tax of 19.5%, which is 10.5% lower than what the Malaysian government charges.
He says the forecast CPO price of RM3,000 to RM3,500 “would go haywire” if the undercutting of prices were to continue.
“We will have to see what our minister achieves in the current meeting in Yogyakarta,” he says.
Players in the sector will have to sacrifice margins as they give discounts to remain competitive in CPO. He says that nothing much can be done if palm oil producers do not raise the issue with the government.
The same sentiment is shared by CIMB Research as it prefers Indonesian plantations for the lower refined export tax there.
In a separate report by Rabobank, it says the contracting palm oil supplies will continue to pose an upside risk to Malaysia Derivative Exchange (MDEX) palm oil prices.
It says prices have underperformed relative to the Chicago Board of Trade soy oil prices in recent months with the price discount widening to more than US$200 per tonne, which will lead to higher end-user demand.
In another report by OSK Research, it also sees a short covering in soybean oil.
Rabobank says: “The price decline of MDEX Palm oil to RM2,810 per tonne in mid-June was largely due to the spillover negative macro environment and falling energy prices. Given the declining palm oil stocks in Malaysia and deteriorating weather conditions in other major oilseed producing regions, prices will continue to find support above RM3,100 per tonne based on fundamentals.”
It also says price risk continues to be skewed to the upside without a significant improvement in weather conditions in the coming weeks.
Meanwhile, Kenanga Research and OSK Research report that the price of CPO will increase if the El Nino phenomenon returns in the second half of 2012. It will cause a distress effect on palm oil production.
According to Australia Bureau of Meteorology, all seven models surveyed indicate that conditions are likely to approach such a scenario, says Kenanga Research in its report. This is echoed by the US Climate Prediction Center that there is a more than 50% probability that El Niño conditions will develop during the second half of 2012.
Kenanga Research says the crude palm oil (CPO) inventory level of 1.7 million tonnes was 4% below the consensus estimate of 1.77 million tonnes.
“The stock-to-usage ratio declined significantly to 8.4% in June 2012 from 9.4% in May 2012. On the overall, the sustained drop in the stock level and stock-to-usage ratio for the fourth month is positive for CPO prices,” it says.
Kenanga Research and OSK Research also report that the highest growth of consumption is seen in China and India.
Kenanga says China’s consumption increased 38% while India’s went up 28%. The rationale for the climb is China’s replacement of CPO for soybean oil as a cheaper option.
OSK Research reports that China’s edible oil purchases for the first half of 2012 surged 24.9% year-on-year while its soybean purchases rose by 22.5%.
“This suggests that despite lingering concerns of China’s weakening economy, the demand for basic food items remains steady,” OSK Research adds.
Both Kenanga Research and OSK Research choose Genting Plantations Bhd and Kuala Lumpur Kepong Bhd (KLK) as their top picks. OSK Research says these planters have a sizeable exposure to Indonesia plantations as production there is still seen as robust.
Kenanga Research’s target price for KLK is increased from RM22.10 to RM23.50 whereas OSK Research’s fair value for the stock is RM27.20.
As for Genting Plantations Bhd, Kenanga Research raises the target price for the stock to RM10.70 and OSK Research tags RM11.34 as its fair value.
Genting Plantations closed 8 sen lower to RM9.75 while KLK was down 32 sen to RM23.84.
CIMB Research’s preference is Sime Darby Bhd. The stock was last done at RM9.94.
Kenanga Research’s picks for planters are those with pure exposure to upstream operations due to their higher earnings sensitivity to CPO prices.
“For every RM100 increase in CPO prices, we expect a 5% to 6% increase in these companies compared to other planters with lower sensitivity range of 2% to 4%,” it says.
Kenanga Research and CIMB Research share that with festive season nearing, CPO prices may increase due to the Ramadan demand.
Kenanga Research and OSK Research maintain their “overweight” calls on the sector while CIMB Research maintains its “trading buy”.