08/12/2011 (Borneo Post) - The oil palm plantation sector is not forecasted to see a production dip in the first quarter of calendar year 2012 (1QCY12) beyond the normal seasonal downturn.

HwangDBS Vickers Research Sdn Bhd (HwangDBS Research) highlighted, “In the face of currency volatility and a slowing global economy, we recommend planters with earnings diversification and volume growth.

“With a forecasted four million metric tonne increase in calendar year 2012 (CY12) palm oil supply, earnings growth of young and well-diversified planters should outperform mature ones in a down cycle.”

On the climatic conditions, the research house reckoned that even a moderate La Nina was still capable of reducing South American soybean yields in 1QCY12 which were already forecasted to ease due to a shift to corn.

“Should this occur, soybean and palm oil prices could rise further” HwangDBS opined.

The Malaysian Meteorological Department estimated 40 to 60 per cent more rainfall in northern Peninsular Malaysia states and 20 to 40 per cent more in Sabah, Johor and Pahang for November and December this year.

Meanwhile, the Indonesian meteorological agency expected a not-so-severe precipitation for January and February 2012 over Sumatra and Kalimantan, thus implying that the seasonal drop in 1QCY12F palm oil output might not be as steep as feared.

Recent conversations with planters had also revealed expectations of about five per cent y-o-y increase in the 1QCY12 output – though still seasonally lower than 4QCY11.

While palm oil demand normally fell during the winter period, the key issue was whether the seasonal supply downtick would be severe enough to cause a year-on-year (y-o-y) decline, thus triggering a price jump.

“With a little help from the recent spike in plantation wages, we do not anticipate 1QCY12 output to dip beyond the seasonal downturn.

“While we expect palm oil prices to seasonally strengthen in 1QCY12, we believe prices should hover between RM3,000 and RM3,350 per metric tonne,” HwangDBS Research stated.

With regards to the global economic climate, the research house observed repatriation of European funds and resumption of the US dollar’s status as a safe haven had weakened the ringgit/Singapore dollar/Indonesian rupiah cross rates.

“As prices in local currencies spike, any upside in palm oil prices may be limited next year. Further mark-to-market losses on inventory cannot be ruled out as well, if crude palm oil (CPO) prices fail to jump on lower seasonal output by February 2012,” HwangDBS Research noted.

The research house named its top picks in the sector namely First Resources Ltd and Sime Darby Plantation Sdn Bhd. It also noted Indonesian planter PT Sampoerna Agro Ptk for its attractive valuation.