14/8/06 (The Star)  -  THE strengthening of the crude palm oil (CPO) prices has generated optimism that the commodity is fast narrowing the price differential gap with its major edible oil rival, soybean.

Many commodity analysts and industry players are revising their CPO annual average price forecasts to a much higher level at RM1,500 per tonne this year, RM1,650 in 2007 and RM1,800 in 2008.  

 
M.R. Chandran
Last Friday, spot month August finished at RM1,640 per tonne while three-month CPO futures rose above its two-year high to settle at RM1,660 per tonne. The trading of the commodity was stagnant in the first half of the year, averaging RM1,400 per tonne.

Commodity expert and the Roundtable on Sustainable Palm Oil advisor M.R. Chandran said: “I believe the discount, which palm oil often trades to soybean oil, can be narrowed, given the increasing number of biodiesel plants in Asia and demand from biodiesel suppliers in Europe.”

He told StarBiz in Kuala Lumpur that palm oil had been trading at a US$50 to US$100 per tonne discount range against soybean in the past. This is due to the perception that palm oil was “a cheap edible oil” as misconstrued by anti-palm oil lobbyists and anti-tropical oil campaigns in Western countries.

Chandran said the CPO price discount versus soybean had now narrowed to about US$20 to US$30 per tonne due to the biodiesel boost, continued higher crude oil prices as well as the anticipation of lower CPO production from major producers, Malaysia and Indonesia, this year.

Fundamentally, he said world CPO demand was expected to outstrip supply this year. 

“The soybean production from Brazil and the United States are also expected to fall this year. Meanwhile, Malaysia and Indonesia are not likely to reach the projected CPO production of 15.7 million and 16 million tonnes this year,” Chandran added.

On whether CPO could be traded at a premium against the soybean in the near term, he said: “Who knows? I do not foresee it happening so soon but the narrowing of the price differential gap is taking place now.” 

 
Chandran said CPO had, at one point, traded at a premium of US$10 to US$20 per tonne to soybean when prices soared between RM2,600 and RM2,800 per tonne in 1998 during the Asian financial crisis.

On biodiesel plants in Malaysia, he said: “It was a good move by the Government to temporarily freeze the licence for biodiesel production.”

However, Chandran is sceptical about the six million tonnes of CPO allocation set aside by the Government for biodiesel plants in the country. 

“I still prefer free market flow and let our local biodiesel industry grow by leaps and bounds,” he added.

Closed-end fund iCapital.biz Bhd managing director Tan Teng Boo said the current rally in CPO prices was not mainly driven by the demand for the commodity as feedstock for biodiesel production. 

“It's all about the commodity price cycle. I believe hedge fund managers are switching from hard commodities such as iron and steel to soft commodities such as wheat, soybean and palm oil,” he added.

He said there was a speculative element in the CPO price hike, especially with biodiesel plants making rapid progress in Asia, the US and Europe.  

 
Another plus factor was the uncertainty in the global weather pattern, which affected most oilseeds production this year.

Commodity analysts believe palm oil is entering its uptrend price cycle in the second half of this year and is showing no sign of weakening.

The price cycles would normally last between three and a half to four years, with the exception of the 1994 to 2000 price cycle.

Analysts, meanwhile, are recommending investors to stick with companies producing raw materials particularly palm oil plantation firms.

HLG Research, in its latest plantation sector report, said the upside in CPO price would be capped by crude oil prices, as biodiesel would only be economically feasible if CPO price stayed at maximum of RM1,700 per tonne.

Despite its underweight rating on the plantation sector, the research outfit is upgrading its financial year 2006-2008 earnings forecast on IOI Corp Bhd, Kuala Lumpur Kepong Bhd, PPB Oil Palms Bhd, Asiatic Development Bhd and Unico-Desa Plantations Bhd by 3.8% to 13.6%. 

 
“We continue to like the sector's promising outlook and rising demand but the appreciation in share prices in recent weeks has been stretched.”

HLG Research sees limited upside at current price levels and is advising investors to wait for a price correction before accumulating again.

It added that major risks to its tactical strategy included a better-than-expected uptake in biodiesel, unfavourable weather conditions that could disrupt oilseeds supply and higher crude oil prices, which could result in higher-than-expected CPO price. 

“We think CPO price will sustain at the RM1,600 per tonne level this year, as some biodiesel plants and food producers are expected to start accumulating their palm oil inventories early,” the brokerage said.