21/11/05 (The Star)  - THE price of crude palm oil (CPO), which is showing no sign of weakening, has the potential to register further increase as it enters into the new price cycle by year-end.

With the exception of 1994-2000 price cycle, commodity analysts said the palm oil price cycles over the past 12 years lasted between 3.5 and four years each. 

The commodity is now in its fourth-year cycle with spot price for Nov South trading at RM1,425 per tonne last Friday.

Analysts are generally positive about the commodity's price going forward, targeting the average price of CPO at RM1,550 per tonne next year, RM1,650 per tonne in 2007 and RM1,700 per tonne in 2008.

 
Oil palm fruits after harvest.
They also expect limited downside to CPO’s long-term price trend, given the emerging dynamic structural changes such as active biodiesel production in Europe, implementation of biofuel policies in Asian countries, China's high oils and fats consumption as well as the trans-fatty acid and genetically-modified organisms (GMO) issues in the US and Europe.

Deutsche Bank, in its latest research notes, cited the exciting development in the biofuel policies in Asia.

If Asia biofuel policies took place as planned, it was believed that an additional nine million tonnes of vegetable oils, or about 14% of the total Asian oilseed production, would be required. 

It said the global supply of CPO has been growing at an average rate of 9% since 2000, while demand has kept up at the same pace within the time period. 

“The equilibrium is likely to change with Asian countries, such as Malaysia, embracing biofuel policies,” the bank said.

On the other hand, Deutsche Bank said whether or not the European Union uses more palm oil as feedstock for its biodiesel requirements, is not the major issue.

“We strongly believe the future price of palm oil will be driven by the Asian demand trend - whether it relates to edible oils and an increase in biofuel consumption within the region,” the bank added.

 
Given the additional demand for palm oil coming from increasing biofuel policies in Asia and biodiesel supplier from Europe, analysts are of the view that the discount at which palm oil trades against soybean oil - its major edible oil rival - should start to narrow further. The palm oil price is currently traded at a 30% discount to soybean oil. 

Avenue Securities analyst Keith Wee believed the price of CPO next year would be firmly supported by the steep discount to soybean.

He said the price discount between CPO and soybean oil had narrowed marginally of late, mainly due to the stronger-than-anticipated soybean harvest in the US and lower production of Malaysian CPO due to tree stress effect.

The Oil World has forecast CPO price to trade at a relatively steep discount of US$120 per tonne against soybean oil in the coming months. This is relatively high compared with the three-to-four-year average of US$80 to US$100 per tonne.

 
Wee said the higher-than-anticipated soybean harvest in the US will be offset by increasing demand for soybean for biodiesel usage in the US as new biodiesel production capacities will come on stream next year while the South American soybean harvest early next year is expected to be disappointing due to reduction in plantings this year.

Avenue Securities is maintaining its CPO price estimates at RM1,550 per tonne next year as the seasonally-weak production period in early 2006, coupled with lower FFB yields stemming from the tree stress effect, should help to support an estimated 10.7% year-on-year rise in average CPO price for this year.

Meanwhile, SBB Securities' year-end target price for CPO stood at RM1,480 per tonne, with a six-month average price of RM1,580 to RM1,600 per tonne, given the prospect of ringgit appreciating to RM3.60 going forward.

 
The brokerage, which has a neutral stance on the plantation sector, said: “We hope to review our call once the specific biodiesel structural policy is fully announced by the Government.”

SBB Securities concurs that biodiesel will be the catalyst to sustain the high price for CPO next year.

“While it will help CPO price to move higher, the aggressive shift to produce biodiesel in the medium term will be dependant entirely on whether the incentive and basic framework of the National Biofuel Policy will be attractive to attract private participants,” the brokerage said.