PRICE UPTREND: Workers gather oil palm fruits at a factory in Sepang. Lim expects CPO prices to benefit from a CPO output
dip in 2Q12 and diminishing soybean production as palm oil is commonly used as substitute for soybean oil. — Reuters photo

28/03/2012 (Borneo Post) - Crude oil palm (CPO) prices are expected to trend higher due to projected moderation in output as well as soybean production disruption in South America.

Kenanga Investment Bank Bhd (Kenanga Investment) analyst Alan Lim stated that CPO production growth was poised to decline by 1.5 per cent year-on-year (y-o-y) to 1.4 million metric tonnes (mmt) this month and this trend might continue throughout the second quarter of 2012 (2Q12), hence pushing CPO prices higher.

“After 12 months of a strong production up-cycle, we think the effect of biological stress will kick in very soon. Meanwhile, South America’s soybean oil production prospect has worsened due to the severe drought experienced in the first half of March in Brazil.

“We expect CPO prices to benefit from this as it is commonly used as substitute to soybean oil. CPO demand-supply fundamentals continue to be strong in the 2011/12 season, as the expected demand growth of 6.6 per cent y-o-y surpassed the production growth estimate of 5.6 per cent y-o-y,” he stated.

Hence, the stock to usage ratio should decline further to 15.6 per cent (representing a 90 percentage point decline from 16.5 per cent last year).

Malaysia’s CPO production up-cycle from March 2011 to February 2012 had been strong with y-o-y growth of between two to 26 per cent.

Regarding Kenanga Investment’s forecasted production downtrend, Lim pointed out that the Malaysian Palm Oil Board’s forecast for this month’s production was even more conservative at 1.2mmt, implying a higher y-o-y decline of 15.3 per cent.

Historical trend in the past 10 years suggested that consecutive CPO production increase y-o-y would only last between seven to 13 months. In addition, February 2012 production was already showing a slowdown in y-o-y growth to 8.3 per cent (from January’s 21.7 per cent).

Meanwhile, resilient CPO demand from Asia should continue into 2Q12, supporting the analyst’s bullish view on CPO prices. Indonesia’s CPO usage was expected to register the strongest growth y-o-y of 12.5 per cent in Asia, ahead of China’s 9.3 per cent and India’s 4.7 per cent.

In addition, China had started to buy more palm oil in view of its depleting stocks with Malaysian exports to China improving significantly by 39 per cent month-on-month to 302,000 metric tonnes.

Global soybean production was expected to plunge by 8.5 per cent y-o-y to only 243.2mmt in 2011/12 season. In order to cover the lower soybean oil supply, CPO demand would increase as it is commonly used as substitute to soybean oil, and hence CPO prices are likely to appreciate further in 2Q12.

“Higher edible oil consumption per capita in developing countries, population growth and possible higher mandate for biodiesel will continue to keep CPO stocks tight in the longer term, hence our longer term bullish view on CPO prices,” he concluded.

Overall, the analyst increased Kenanga Investment’s 2012 average CPO price by 3.2 per cent to RM3,200 per mt (from RM3100 per mt). He also revised the research house’s financial year 2012 and 2013 earnings forecasts upwards for all planters under its coverage resulting in one to five per cent increase in earnings.

He pegged the target prices of Genting Plantations Bhd (RM9.90 per share), Kuala Lumpur Kepong Bhd (RM23.60 per share) and IOI Corporation Bhd (RM5.60 per share).

He was bullish on Sime Darby Bhd (TP: RM11.60) and IJM Plantation Bhd (RM4.25 per share) on better valuation. To leverage on double digit fresh fruit bunch (FFB) growth, he also picked on Ta Ann Holdings Bhd (RM7.75 per share) and United Malacca Bhd (RM8 per share).