07/03/2011 (The Star Online) - Plantation stocks are back on the radar of most brokerages as rising crude oil prices have given a boost to crude palm oil (CPO), an alternative feedstock for biofuel production.

On Bursa Malaysia yesterday, Kuala Lumpur Kepong Bhd (KLK) headed the gainers' list, rising 60 sen to close at RM21.10. Big plantations on the rise include United Plantation Bhd, which settled 30 sen higher at RM17.60, while Sime Darby Bhd added nine sen to RM9.17 and IOI Corp Bhd firmed up 16 sen to RM5.73.

With crude oil rising above US$100 a barrel, analysts said that production of biodiesel using CPO would be deemed viable again.

The local CPO futures ended yesterday above RM3,600 a tonne with the three-month benchmark May contract closing higher at RM60 to RM3,660 a tonne.

Jupiter Securities head of research Pong Teng Siew told StarBizWeek that the rise in most local plantation stocks now was driven by fundamentals.

“They include lower inventory levels, supply constraint due to palm tree stress and severe floods in major producing areas on the back of continued increasing demand for CPO.

“The current supply constraint is affecting not only palm oil but also many other food-based agriculture crops like soybean and wheat,” he said.

Pong, who is bullish on the plantation sector, said: “I expect CPO can even exceed the previous high of RM4,486 per tonne in 2008 by the latter part of this year should the supply constraint persist.”

HwangDBS Vickers Research in its report yesterday said that plantation stocks would regain their shine as the high oil prices could help limit the fall in CPO prices.

Relative to palm and soybean oil prices, crude oil has been a laggard over the past six months, the report said.

“As such, a rise in crude oil prices does not necessarily translate to a rise in palm and soybean oil prices,” it said. “We expect additional supplies to result in lower palm oil prices in the second half of 2011.”

However, rising crude oil prices could make biodiesel production viable again, HwangDBS Vickers said.

Additional demand from the energy segment would help absorb higher palm oil supplies as well as limit the downside to CPO prices.

For this year, the brokerage expects CPO prices to average between RM2,500 and RM3,000 a tonne, down from the current level of about RM3,600.

It said an anticipated recovery in fresh fruit bunches yields should start from next month onwards and peak during August-November.

“This could result in an increase in the local palm oil inventory, thus increasing CPO price discount to soybean oil,” it said.

A trader said the CPO price discount had narrowed to US$40 to US$50 per tonne from US$140 to US$200 previously.

MIDF Research in its recent report also maintained a positive view on the sector. “We reiterate our average CPO price at RM3,400 per tonne for 2011.