16/04/2012 (The Star) - Slower growth in production and strong export demand will likely help support the price of crude palm oil (CPO) to stay above RM3,000 per tonne well into the second quarter this year.

Market analysts said plantation companies, especially efficient ones with cost of production of about RM1,100 per tonne, would continue to reap comfortable margins at the current CPO price of RM3,510 per tonne.

Kenanga Research said in its latest report that the tree-stress effect on oil palm trees in Malaysia had started. CPO production will turn flat or decline during tree-stress period, which normally lasted for about two years.

Stressed out: Kenanga Research says the tree-stress effect on oil palm trees in Malaysia
has started, which will result in flattish or declining production of CPO.

Therefore, the CPO production upcycle which lasted for the past 12 months (from March last year to February this year) should have ended.

Kenanga said there was a severe decline in CPO production by 14% year-on-year (y-o-y) at 1.21 million tonnes in March.

“The decline is more severe than market expectations of a 7% to 9% drop and Kenanga's forecast of a 2% drop.

“For this month, CPO production is also expected to register a 4% drop (y-o-y) at 1.47 million tonnes,” the research house added.

On export, Kenanga Research said the strong trend would likely continue this month given the cargo surveyor's estimate of an 8% CPO export growth to 479,000 tonnes in the first 10 days of April.

Last month, export surged by 11% month-on-month (m-o-m) to 1.34 million tonnes. Major consumers like Pakistan saw its highest growth of about 125% month-on-month to 78,000 tonnes, followed by Europe which was up 63% at 174,000 tonnes and India higher by 11% at 120,000 tonnes.

The research house said the strengthening of CPO exports to Pakistan in March was probably caused by a normalisation process as February's number was extremely low due to a transporters' strike in the country that caused the closure of factories.

Kenanga said the lower stocks level in March was also below expectation. The CPO inventory level of 1.96 million tonnes was 2% lower than the consensus estimate of two million tonnes and also 6% below Kenanga Research's estimate of 2.08 million tonnes.

Meanwhile, ECM Libra Investment Research is maintaining a “neutral” call on the plantation sector with the estimated average CPO price for this year at RM3,000 per tonne.

ECM Libra said in its latest sector update that CPO production in March was up 2% month-on-month to 1.2 million tonnes but down by 14% year-on-year. It said the increase in CPO production month-on-month in March signalled that production levels could strengthen going forward.

“We expect second quarter 2012 (production) numbers to be higher but still below last year's second quarter numbers,” added ECM Libra.

On inventory, it said: “The inventory levels (in March) was lower as exports have increased stronger than production, allowing inventory levels to come down.”

The last time inventory level dropped below two million tonnes was in August last year.