10/11/2007 (The Star Online) - The oil palm fraternity will need to get used to a series of sharp spikes in crude palm oil (CPO) prices for at least another 12 months.

The bullish performance of CPO prices, particularly over the past four months, has surpassed plantation analysts’ earlier price estimates ranging from RM1,900 to RM2,500 per tonne this year.

In on-the-spot market, the commodity is trading slightly above RM3,000 per tonne – an all-time high – compared with the previous record of RM2,800 per tonne in 1998.

So why is CPO such a “hot” commodity lately? 

Fundamentally, the price of this commodity will remain firm, given the supply constraint as major producers – Malaysia and Indonesia – will miss their 2007 output targets of 16.5 million and 17 million tonnes set earlier respectively as production is affected by the late-developing La Nina risks.

This year, Indonesia’s production is revised to 16.8 million tonnes and Malaysia at 15.4 million tonnes.

On the global front, there are expectations of further declines in world stocks of oilseeds, grains and oils and fats in 2008. The global supply and demand imbalances are getting more severe due to additional crop losses with strong demand aggravating the tightness.

The global market will be subjected to the need to replenish grain stocks, meeting edible oil demand and catering to the ambitious biofuel target.

Another contributor to the strength in prices of world vegetable oils, including CPO, is the new record set in crude oil prices, trading close to US$100 per barrel mark. This has resulted in speculation of higher demand for soy oil, palm oil and rapeseed oil from biodiesel producers.

Across Asean, biodiesel plants are coming on stream aggressively in early 2008, which will be reflected clearly on CPO demand.

Interestingly, the trading discount in prices between CPO and vegetable oils like soya oil and rapeseed oil are set to narrow further as the soy and rapeseed markets are affected by downstream tax credit and lower production areas.

Wheat recently emerged as the new contender in the fight for planting acreage in the US, apart from soy and corn.

The CPO demand from edible oils market, however, will outstrip supply growth over the next five years. Even in the absence of a pick-up in the biodiesel sector, this will provide a strong support for CPO prices, biodiesel investment and continued tight supply in competing oil markets.

At the same time, prolonged and higher CPO prices could lead to potentially “super-normal” profits for oil palm plantations in Malaysia.

Under the plantation analysts' radar include players such as IOI Corp Bhd, Kuala Lumpur Kepong Bhd, Asiatic Development Bhd, IJM Plantations Bhd and Tradewinds Plantation Bhd.

Some analysts are revising their earnings per share forecasts on local plantation companies 14% higher despite lower fresh fruit bunches yield and Government’s cess tax under the cooking oil stabilisation scheme.

Some quarters maintain that while RM3,000 per tonne CPO selling prices still looks possible, RM2,400 is considered a more sustainable CPO selling price without Malaysia losing her export share.