CPO prices continue to succumb to an unexpectedly high palm oil production, increasing palm oil inventories and the overall
weak sentiment in the economies of major importing nations.

12/10/2013 (The Star) - With barely three months left in 2013, many oil palm players seem to have come to terms with the likelihood that crude palm oil (CPO) won't climb back above the RM2,500 per tonne mark by year-end.

This is especially so when the price of CPO continues to succumb to unexpectedly high palm oil production and the overall weak sentiment in the economies of major importing nations.

Well-known palm oil trader Dorab Mistry of Godrej International Ltd, who has traded palm oil for the past three decades, even predicts that CPO futures on Bursa Derivatives Exchange will retreat to as low as RM2,000 per tonne should its rival soybean producers in Brazil and Argentina record strong harvests, and Brent crude oil drop below US$100 per barrel for the rest of 2013.

He points out that weakness in the currencies of emerging-market economies could also act as an import tax and would disrupt demand for commodities.

So far this year, CPO futures have lost over 4% - extending the combined 36% slump seen in 2011 and 2012 - and it is poised for a third year of losses, which would be the worst run since at least 1996, according to data compiled by Bloomberg.

Furthermore, judging by the latest palm oil monthly statistics issued by the Malaysian Palm Oil Board (MPOB) on Thursday, the weak sentiment in prices will not improve much, especially with CPO production in September standing at 1.91 million tonnes - the highest since October last year.

According to industry players, the over-productive nature of oil palm trees so far this year is expected to last until January. This could put more pressure on the existing high palm oil stockpile.

Palm oil inventory for September stood at 1.78 million tonnes, the highest level since May this year and the biggest jump since September last year.

To help contain the situation, the Government has left the CPO export tax unchanged at 4.5% for the eighth month in a bid to encourage shipments and prevent a build up in palm oil stocks during the peak output season.

For this month, palm oil cargoes will be taxed at 4.5% based on the reference price set at RM2,306 a tonne, according to a Customs Department statement. The tariff was zero in January and February before rising to 4.5% in March.

Meanwhile, United Malacca Bhd (UMB) chief executive officer Dr Leong Tat Thim points out that many planters are still making profits as CPO is currently trading at RM2,300 to RM2,450 per tonne, slightly lower than last year’s average of RM2,500 per tonne.

“The issue here is that planters’ cost of production has gone up particularly with the minimum wage factor and the hike in diesel fuel by 20 sen.

“For example, UMB’s costs have gone up on average to about RM1,400 per tonne this year as we have to pay additional transportation and labour costs.

“This is compared to a lower cost of production of about RM1,300 per tonne in 2012.”

At the same time, he adds that Malaysian plantations are experiencing higher yields this year, even though local CPO production usually peaks in the traditional high output season of September and October.

Despite the challenging CPO price scenario, Leong is optimistic that the commodity won't erode to below RM2,000 per tonne by year-end.

“From now on, it will depend on how well oil palm planters can handle their escalating production costs,” he adds.

RHB Research in its latest fourth-quarter 2013 strategy report kept a “neutral” call on the plantation sector, even though it expects a better outlook in 2014.

The research unit says: “We believe palm oil prices will strengthen to RM2,600 per tonne next year from RM2,400 this year as demand improves in tandem with the global economy.”

However, in the immediate term, some price volatility is to be expected, as inventory builds up in the next one to two months when production peaks.

“While a near-term inventory increase is inevitable, we do not think the rise will be alarming due to the current low stockpile.

“That said, any stock price weakness may present a buying opportunity for investors,” adds RHB Research, which has a “buy” call on Sime Darby Bhd, Sarawak Oil Palms Bhd and CB Industrial Product Bhd.

The brokerage also thinks Kuala Lumpur Kepong Bhd will be the biggest beneficiary of an upswing in CPO prices as it has the largest downstream business in Indonesia of any Malaysian planter when its refineries in Dumai and Mandau are ready by early next year.

HwangDBS Research in its report also expects sequential earnings recovery for plantation companies.

“Despite lower prospective palm oil prices in the near term, we expect most planters’ second-half 2013 earnings to rebound premised on seasonally higher CPO sales volumes and lower unit costs,” says the research house.