08/03/2013 (Borneo Post) - Plantation stock research analysts have taken note of various price forecasts for crude palm oil (CPO) average selling prices (ASPs) quoted by several industry experts speaking at the Palm Oil Conference (POC) 2013 which was held in Kuala Lumpur and given their own interpretations of the industry’s forecast.

Against a backdrop of global economic gloom affecting international markets, the palm oil industry itself is facing record high inventory levels (which in turn suppress ASPs for CPO), growing supply from Indonesia due to aggressive expansion, moderate growth of oleochemical demand as well as subdued demand from biofuels, as highlighted at the conference.

The most bullish CPO price estimate came from Malaysian Palm Oil Council chief executive officer Tan Sri Dr Yusof Basiron who believed that CPO prices should trade between RM,2500 and RM3,200 per metric tonne (mt) in 2013 due to his expectation of a lower stock to usage ratio for palm oil by end of the year.

In contrast, the most bearish prediction came from Godrej International Ltd director Dorab Mistry, who predicted that CPO prices would fall below RM2000 per mt in July to August this year but did not think that it would fall below RM1,800 per mt.

Hoe Lee Leng of RHB Research Institute Sdn Bhd (RHB Research) noted that most speakers at POC 2013 were aligned with the research house’s view that the first half of the year would “see prices strengthening, on the back of the low production season, resulting in a draw-down of CPO stock levels in Malaysia”.

“We believe that production tends to bottom out in February or March, and the inventory down-cycle tends to hit a trough in May or June. This means we have another three to four months of easing inventory.

“Looking at the quantum of decline, the average decline since 1988 was 399,000mt from peak to trough. Malaysia’s inventory peaked at 2.63 million mt in Dec 2012. This will put inventory level at 2.23 million mt by May or June.

“As for the second half of 2013, most of the speakers were also in agreement with our belief that prices would weaken during this period, as production levels start ramping up towards the peak production season again,” the analyst stated.

She left RHB Research’s in-house CPO price forecasts of RM2,800 per mt for 2013 and RM3,000 per mt for 2014 unchanged for now but stated that the CPO price assumption would be revisited in the middle of the year.

Meanwhile, Lim Seong Chun of the research arm of Kenanga Investment Bank Bhd (Kenanga Investment) stated, “Our average CPO price forecast for 2013 is at RM2,500 per mt, which is more optimistic than Dorab Mistry as we believe that CPO prices should increase to about RM2,700 per mt by June before bottoming at RM2,100 per mt in the peak production season in September to October.

“We believe that the key variance between our forecast and Dorab’s lies in the price outlook for Brent crude oil.

“Our in-house economist is projecting West Texas Intermediate crude oil to average US$97.50 per barrel in 2013 (implied Brent crude oil: US$113 per barrel) as he thinks that the global economy should still be growing in 2013 despite being at sub-par growth.

“We anticipate palm oil demand to pick up in the northern hemisphere during April to September as the weather warms up. This should allow palm oil to become usable again.”

Lim added that additional demand growth should come in from the biodiesel market too due to its huge discount against Brent crude oil, which made it economically viable to produce even without government subsidy.

Ong Chee Ting of Maybank Investment Bank Bhd presented a strong caveat in opining: “While we hear speakers predicting strong CPO production growth in 2013, there is a possibility that those predictions may not materialise.

“Two large Indonesian planters have warned of a possible slowdown in production as trees enter into ‘resting’ mode in 2013 after two good years of harvest in 2011 and 2012.

“Also, the speakers, in giving their price outlook assume a normal weather scenario. Should bad weather hit any of the major producing areas, all bets are off.

“Interestingly, the weather has been anything but normal in the last few years. And, we are skeptical of a normal weather expectation,” Ong said while maintaining the in-house CPO ASP assumption of RM3,000 per mt for 2013.

The analyst stated that demand for palm oil would stem from strong demand from the energy and transportation sectors amidst low CPO price, and still huge CPO price discount to soybean oil of US$333 per mt currently riding at double its historical average.