30/12/2008 (The Star Online) - PETALING JAYA: Malaysia is expected to carry more than two million tonnes of palm oil inventory into 2009 as crude palm oil (CPO) production is estimated to remain high in December, say plantation analysts.

The anticipation of high inventory and production will also limit the new price upcycle of CPO, which has fallen 70% in the past seven months from its peak of RM4,486 a tonne.

Analysts concurred that the persistently high inventory would see the average CPO price in 2009 traded at the RM1,520-RM1,650 per tonne range.

OSK Research analyst Alvin Tai said: “It is too early for a new upcycle in prices.”

While CPO prices seem to have hit rock-bottom and a rebound is in store, he said market conditions were not ready to boost CPO prices as the inventory was still high.

For CPO prices to stage a sustainable run-up, inventory would need to ease considerably, Tai said in OSK’s latest Investment Strategy 2009 report.

“We think this will happen next year as major producers Indonesia and Malaysia start to burn off palm oil via their biodiesel iniatives,” he said.

Malaysia’s mandatory 5% biodiesel blend, to be fully implemented by 2010, will take up 500,000 tonnes of palm oil from the market.

Indonesia, which is more aggressive in its mandatory biodiesel implementation, is expected to use over two million tonnes of palm oil.

“The use of biodiesel on a mandatory basis also supports the case for the decoupling of palm oil from crude oil,” Tai said.

He said CPO prices should then trade at a premium to crude oil as “they did in 2006 and 2007 when Europe was pushing for a self-imposed target to have 5.75% of energy from renewable sources by 2010.”

In addition, the CPO discount to soybean is also expected to normalise back to US$150 per tonne if the inventory can be pared down, thus bringing CPO prices to RM1,960 to RM2,314 per tonne assuming soybean prices remain unchanged. The CPO discount to soybean hit a record high of US$429 per tonne at end-August due to high inventory. It has dropped to US$244 per tonne currently.

HwangDBS Vickers Research, in its latest Investment Strategy note, said CPO prices were forecast to stay weak at an average of RM1,520 per tonne in 2009 from 2008’s projection of RM2,830.

The forecast was based on expectation of rising inventory from the record of 2.3 million tonnes in November as China’s imports weakened and slower economic growth in Asia became more apparent.

The research unit, which has an “underweight” rating on the plantation sector, also thinks both Malaysia and Indonesia would remain unsuccessful in cutting CPO supplies next year.