22/12/2012 (The Star) - The local plantation sector is set to face a trying time in the year ahead, it would seem.

High crude palm oil (CPO) inventories may cap the upside for CPO prices and drive down earnings of plantation companies, while demand from China may slow due to tighter regulation on edible oils to come into force from Jan 1.

Most analysts covering plantation stocks remain cautious on the outlook for the industry, expecting prices to remain under RM2,500 per tonne in the first half of the year.

Kenanga Investment Bank Bhd analyst Alan Lim expects the general news flows for the industry to be discouraging in the first quarter.

“Although the inventory level could have peaked at 2.56 million tonnes in November, we expect it to remain high at above two million tonnes throughout Q1, hence limiting the CPO price upside,” he said in a report.

Lim said earnings may “fall off the cliff” when plantation companies reported their financial results in the February earnings season for the fourth quarter ending Dec 31, with at least a 30% year-on-year (y-o-y) and 20% quarter-on-quarter (q-o-q) drop in line with the low average CPO price of RM2,250 in quarter, which represented a 25% drop y-o-y and 21% decline q-o-q.

His earnings outlook comes against a backdrop of the depressed earnings of plantation firms in the third quarter.

“We believe the planters’ Q4 earnings will likely fall by at least the same magnitude, as CPO prices have had a significant influence on planters’ earnings historically,” he said..

“However, conglomerates with earnings support from their other divisions such as Sime Darby Bhd and PPB Group Bhd should be less affected,” he added.

Palm oil traders told StarBizWeek, however, that prices may be supported in the coming months as China would likely stock up on edible oils ahead of the Chinese Lunar New Year celebrations.

They also said that the high stock situation could be reduced further on a combination of the traditionally low production months between January and March, while palm oil may become more attractive compared with soyoil, which traditionally trades at a premium.

Furthermore, analysts believe that the reduction in the CPO export duty and abolishment of the duty-free CPO export quota by Jan 1 would also help support prices by clearing inventories.

Lim said other factors to impact prices negatively included the drop in demand from the northern hemisphere, where consumers may switch to edible oils that do not solidify as easily in cold weather, the recent US Department of Agriculture forecast of higher soyoil inventories, and the unlikely appearance of El Nino weather patterns in the near term.

As a result of the drop in the northern hemisphere demand, he believes that the CPO export downtrend will continue with a 3% month-on-month (m-o-m) drop in December, even though December production is expected to decline 12% m-o-m, remaining high at 2.51 million tonnes.