MARKET DEVELOPMENT
29-09-2001
CPO prices seen regaining strength
Investment advisor Surf88.com examines the prospects for palm oilCRUDE palm oil price below RM1,000 per tonne. The price of crude palm oil(CPO) has fallen below RM1,000 per tonne since mid-September. Beforeinvestors rush to cut exposure to plantation stocks, let us take a look atthe latest global demand and supply of edible oils, and the implicationson CPO.The Indian factor: The turn in sentiment was triggered by sluggish demandfrom India on expectations of a good local harvest, and alsodisappointment that India has maintained its high palm oil import dutyafter a seemingly positive meeting between the Malaysian and Indian PrimeMinisters. The recent depreciation of the Indian rupee against the USdollar was another dampener. We understand that Indian demand has remainedsluggish in the past two weeks or so, with no firm major orders for thecoming weeks.Meanwhile, the US catastrophe ignited concern that Pakistan buyers,another major im-porter of palm oil, may not be able to raise letter ofcredits (LCs) to fund their purchases.What could change? One possible factor that could reverse the trend wouldbe a deterioration in the current soyabean and groundnut crop, which wouldnecessitate India to import more. We note recent reports citing lessfa-vourable weather conditions in India, which albeit preliminary, is atrend which should be monitored. We would also keenly watch the rupee andthe Indian government’s stance on the currency. As for Pakistan, thesituation is in a flux given the potential US retaliation and as such palmoil import is unlikely to be top on the agenda in the short term.Nonetheless, in-dications of fresh demand from Pakistan last Friday didperk up a sluggish market, with CPO futures spiking up to RM992 per tonnefor the month of October.Short term price subdued: Short-term fluctuations notwithstanding, the CPOmarket is still in a situation where medium-term supply is shrinking butshort-term demand sluggish. It is hard to see a sustained breakout underthe circumstances. Nonetheless, we see no reason to sell now as the weakdemand phase looks temporary while the medium-term demand picture shouldimprove to support a better price outlook, possibly in the 4th quarter.Soyabean crop estimate reduced: Recall two months ago when we firsthighlighted that ac-tual planting of soyabean in the US was about 2% belowexpectations. Based on the latest crop development, production will alsofall short of initial expectations. The latest production estimate hasbeen cut back by 1.2% to show only a marginal increase from a year ago.There may still be room for further downward revision in view ofdrier-than-expected weather in the Mid-West.Sunflower seed production not looking good: Other than soyabean oil,production of sunflower seed is also below expectations with likelihood ofan eight-year low. Sunflower oil is a major oil, ranking number four inthe world with a 10% global market share.Where does this leave us? Global stocks of edible oil are expected todecline for the first time in three years, while the stocks/consumptionratio is forecast to fall to a record low. Palm oil stock in Malaysia hastumbled from an all-time high of 1.5 million tonnes in November last yearto under 0.9 million tonnes in August this year. Some other local positivefactors we have discussed before include the high possibility of eventighter palm oil supply next year given the good response to thegovernment’s replanting programme which is ex-pected to reduce plantedarea by 5%.Shorter term, CPO prices may remain subdued due to the seasonal productionupturn and the uncertainties over export demand, but we believe theseshould clear up by November for CPO price to resume its strength. Ourex-pectation of CPO price to return to RM1,000 per tonne by year-end andRM1,200 next year.Plantation stocks are inherently resilient: Notwithstanding the CPO priceoutlook, plantation stocks are inherently resilient due to theirabove-average cash flows, balance sheet and generally good management.Quite a few also offer above-average dividend yields. As their resiliencehelps in the immediate trying times, there is the recovery potentialharnes-sed by improved CPO price outlook nearer year-end.Against this background, we would certainly hold on to our plantationspicks at this point in time. In fact, we would look to buy IOI Corp(RM3.38), PPB Oil Palms (RM1.85), United Plantations (RM3) and Chin Teck(RM3.90) should the KLSE fall further under the influence of Wall Street.In terms of technical price targets, we would look to accumulate IOI Corpat below RM3.20, PPB Oil Palms at below RM1.70, United Plantations atbelow RM3, and Chin Teck at below RM3.80. Meanwhile, we would hold KLK, Hi& Lo and Unico-Desa.
