12/12/2013 (Borneo Post) - For the first time in two years, average crude palm oil (CPO) price is poised to see a year-on-year (y-o-y) recovery by RM100 per metric tonne or four per cent to RM2,800 per metric tonne, driven mainly by lower inventory estimate levels in end-2014.

As it is, average CPO prices thus far in the fourth quarter of 2013 (4Q13) is at RM2,521 per metric tonne or three per cent higher than the 4Q12 level of RM2,465 per metric tonne.

Analyst Alan Lim from the research arm of Kenanga Investment Bank Bhd (Kenanga Research) pointed out that while the three per cent increase may be small, the change in direction from a successive eight quarters of earnings decline y-o-y to earnings growth of at least 10 per cent could act as a catalyst for the plantation sector.

“We expect the trend of earnings recovery to last throughout 2014 as we believe CPO prices should improve y-o-y to RM2,800 per metric tonne from the low base of RM2,400 per metric tonne in 2013,” he added.

Lim explained that the main reason for the significant decline in inventory was due to expected lower palm oil import (POI) in 2014.

“As it is, POI for the first 11 months of 2013 (11M13) already declined by 0.78 million metric tonne or 60 per cent y-o-y to only 0.53 million metric tonne (as compared to 11M12 level of 1.3 million metric tonne).

“Putting into perspective, the impact of the reduction of 0.78 million metric tonne of palm oil import into Malaysia is significant as we think this is the key factor that has removed 30 per cent of the peak inventory of 2.62 million metric tonne inventory in Malaysia on December 2012,” he said.

Lim further underscored that inventory is expected to have peaked and he estimated that December 2013 inventory would decline by 2.8 per cent m-o-m to 1.92 million metric tonne.

Additionally, the main reason for the decline will be the seasonally observed sharp 10 per cent decline in production in December based on historical 10-year production trend.

“We believe that the downtrend in inventory can be sustained throughout first quarter of 2014 (1Q14) and this should allow CPO prices to continue appreciating up to RM2,900 per metric tonne by March 2014,” he said.

Going forward, Lim believed that swift Indonesian biodiesel programme should cause POI to decline by another 55 per cent to only 0.24 million metric tonne in 2014. Lim added that this would lift CPO prices higher to average of RM2,800 per metric tonne in 2014.

In addition, higher biodiesel mandate (from eight per cent to 10 per cent) recently announced in Argentina is expected to have a positive impact on CPO prices.

“We expect the news to be supportive to soybean oil (SBO) prices as it should raise demand for soybean oil domestically in Argentina from 0.88 million metric tonne in 2013 to roughly 1.05 million metric tonne in 2014 (based on Oil World estimate).

“We are positive on the news as CPO prices should benefit indirectly from higher SBO prices as both are usually used as a substitute to each other,” he said.

However, HwangDBS Vickers Research Sdn Bhd (HwangDBS Vickers Research) in a separate note cautioned that palm olein (cooking oil) price discount to soybean oil has narrowed significantly year-to-date, and is likely to narrow further on weaker soybean prices.

“This would cap further price gains in both palm oil and plantation counters alike, in our view. We are also concerned about the slow progress of biodiesel per refined bleached deodorised palm oil (RBDPO) tenders by Indonesian player Pertamina/PLN,” it said.

Nevertheless, the research firm said Malaysian plantation counters have outperformed regional indices, and it believed most have already priced in the strong fundamentals.

It further advised to take advantage of near-term positive sentiments to lock-in profit.