Inventory levels and weather to determine future movement

14/12/2010 (The Star Online), Petaling Jaya - Inventory levels and the La Nina weather patterns will determine the price of palm oil, which hit a 30-month high yesterday.

Crude palm oil (CPO) for February delivery rose RM89 to close at RM3,722 yesterday. Analysts expect prices to be firm over the next few months on sustained demand due to end-year festivities and the coming Chinese New Year holidays despite Malaysian plantations going into a production down-cycle after hitting a peak in October.

The market is still focused on concerns over supply, which is still a bit tight, an analyst with a local investment bank told StarBiz. Inventory in November, which stood at 1.63 million tonnes, was 15.4% lower than a year ago. He said wetter weather conditions going into the first quarter of 2011 as a result of the La Nina weather patterns could still affect the planting season and therefore prices going forward.

I still think CPO prices will hover around the RM3,000 to RM3,500 levels by the middle of next year, the analyst said.

According to the Malaysian Palm Oil Board, CPO production in November, at 1.45 million tonnes, was 8.6% lower than a year ago and 10.8% down from October, where there was a recovery despite the weather conditions, while year-to-date, it was 1.8% weaker than last year.

While exports registered a slight 0.1% decline from a year ago, it recovered on a month-on-month basis and year-to-date, was up 4.8% compared to the same period last year.

Another local analyst said it was anybody's guess what the weather conditions would be like six months down the road but the current weather conditions were not normal.

It's not normal to see the flooding that we've seen in the northern part of the peninsula or the extreme cold conditions in Europe, she said, adding that inventories would depend on demand and the weather.

OSK Research Sdn Bhd analyst Alvin Tai said in a report that the November data was the worst November performance since 2005.

While investors should watch out for softening prices starting from mid-2011, we do not think there is any urgency to underweight the sector at this point in time as palm oil price should remain relatively firm given that the supply tightness will persist in the next few months, he said.

Tai maintained the house's average CPO price expectation of RM2,700 per tonne for next year on expectations of a potential bumper harvest in the second-half while for 2010, the CPO price was on track to hit an average price of RM2,700.