MARKET DEVELOPMENT
CPO Price To Remain Bearish in The Near Term — Analysts
CPO Price To Remain Bearish in The Near Term — Analysts
15/11/2011 (Borneo Post) - In anticipation of higher palm oil production and lacklustre global demand going forward, crude palm oil (CPO) price is expected to trend downwards in the medium term.
Amidst uncertain economic condition, demand for the global edible oil had been sluggish with year-to-date purchases for CPO dipping. To recap, China’s edible oil import had fallen by 7.9 per cent, while India had seen a shrinkage of seven per cent in demand.
Senior vice president of OSK Research Sdn Bhd (OSK Research), Alvin Tai told The Borneo Post that while CPO price would trend on bullish grounds this year, it would remain dull in the first two to three quarters of next year.
“We believe average CPO price for next year will be lower than this year as palm oil price appears to have bottomed out; yet due to ample supply and unexciting demand growth, prices have limited upside.
“After this lull period, we could see a start of a new upcycle, which will be driven by a potential peak in Indonesia’s palm oil production in the not-too-distant future. A peak in palm oil supply will also mean that global edible oil supply will also peaks. This will have very serious implication for edible oil price overall,” he said.
Given the weak price outlook, palm oil price, according to Tai, should have fallen to lower levels. According to him, price dips below RM3,000 per tonne levels had not seen follow-through in selling.
“Palm oil price’s volatility has also died down, falling to levels where palm oil price tends to bottom out. Soybean oil speculative position is now net short, suggesting that palm oil also has similar position being near perfect substitutes. Still, palm oil price has continued to hold up.
“We believe palm oil price will enter a period of very dull price action as it continues its bottoming process,” he pointed out.
Inventories, as suggested by the research arm of Kenanga Investment Bank Bhd, Kenanga Research would stay above the two million metric tonne in the fourth quarter of this year.
“We reckon that there is still significant risk to CPO demand due to the economic slowdown in Europe. Over the last 10 years, CPO prices have a strong correlation of 80 per cent with Europe’s gross domestic product (GDP).
“In fact, cargo surveyor Intertek has reported a six per cent drop month-on-month in CPO exports for the first ten days of this month.
“In anticipation of higher palm oil production in the fourth quarter of this year and possibly weaker exports, we reckon that CPO prices will further weaken in the medium term, barring any unforeseen dramatic weather changes,” said Kenanga Research.
European Commission had recently revised the Europe’s GDP growth to only 1.5 per cent for this year and 0.5 per cent next year. These prolonged uncertainties might suppress CPO prices below RM3,000 for the year ahead.
“Currently, we expect an average CPO price of RM3,000 per metric tonne next year, a nine per cent year-on-year shrink. This, however, may still be revised downwards if soybean oil prices stay below US$0.55 per pound for an extended period,” highlighted Kenanga Research.
Taking on a similar stand was Benedictus Santoso from DBS Vickers Securities (Singapore) Pte Ltd, who observed that palm oil prices would continuously be sluggish over the next two years premised on several factors like higher output and recovery of soybean supplies.
“We expect palm oil prices to decline within the next two years due to yield recovery following two years of weather anomalies, new supplies coming in from new maturities from jump in new planting since 2006 and recovery of soybean supplies.
“Having noted that, in the longer term however, we believe palm oil price to trend upwards again on drop in new planting due to land limitation, higher energy prices, global population growth, a heightened increase in biodiesel demand as well as increased cost push from labour and fertiliser,” he explained.
Amidst uncertain economic condition, demand for the global edible oil had been sluggish with year-to-date purchases for CPO dipping. To recap, China’s edible oil import had fallen by 7.9 per cent, while India had seen a shrinkage of seven per cent in demand.
Senior vice president of OSK Research Sdn Bhd (OSK Research), Alvin Tai told The Borneo Post that while CPO price would trend on bullish grounds this year, it would remain dull in the first two to three quarters of next year.
“We believe average CPO price for next year will be lower than this year as palm oil price appears to have bottomed out; yet due to ample supply and unexciting demand growth, prices have limited upside.
“After this lull period, we could see a start of a new upcycle, which will be driven by a potential peak in Indonesia’s palm oil production in the not-too-distant future. A peak in palm oil supply will also mean that global edible oil supply will also peaks. This will have very serious implication for edible oil price overall,” he said.
Given the weak price outlook, palm oil price, according to Tai, should have fallen to lower levels. According to him, price dips below RM3,000 per tonne levels had not seen follow-through in selling.
“Palm oil price’s volatility has also died down, falling to levels where palm oil price tends to bottom out. Soybean oil speculative position is now net short, suggesting that palm oil also has similar position being near perfect substitutes. Still, palm oil price has continued to hold up.
“We believe palm oil price will enter a period of very dull price action as it continues its bottoming process,” he pointed out.
Inventories, as suggested by the research arm of Kenanga Investment Bank Bhd, Kenanga Research would stay above the two million metric tonne in the fourth quarter of this year.
“We reckon that there is still significant risk to CPO demand due to the economic slowdown in Europe. Over the last 10 years, CPO prices have a strong correlation of 80 per cent with Europe’s gross domestic product (GDP).
“In fact, cargo surveyor Intertek has reported a six per cent drop month-on-month in CPO exports for the first ten days of this month.
“In anticipation of higher palm oil production in the fourth quarter of this year and possibly weaker exports, we reckon that CPO prices will further weaken in the medium term, barring any unforeseen dramatic weather changes,” said Kenanga Research.
European Commission had recently revised the Europe’s GDP growth to only 1.5 per cent for this year and 0.5 per cent next year. These prolonged uncertainties might suppress CPO prices below RM3,000 for the year ahead.
“Currently, we expect an average CPO price of RM3,000 per metric tonne next year, a nine per cent year-on-year shrink. This, however, may still be revised downwards if soybean oil prices stay below US$0.55 per pound for an extended period,” highlighted Kenanga Research.
Taking on a similar stand was Benedictus Santoso from DBS Vickers Securities (Singapore) Pte Ltd, who observed that palm oil prices would continuously be sluggish over the next two years premised on several factors like higher output and recovery of soybean supplies.
“We expect palm oil prices to decline within the next two years due to yield recovery following two years of weather anomalies, new supplies coming in from new maturities from jump in new planting since 2006 and recovery of soybean supplies.
“Having noted that, in the longer term however, we believe palm oil price to trend upwards again on drop in new planting due to land limitation, higher energy prices, global population growth, a heightened increase in biodiesel demand as well as increased cost push from labour and fertiliser,” he explained.