Monday February 7, 2005 - THE issue of rising palm oil stocks, resultingin the current downward spiral in crude palm oil (CPO) prices, must not be"overplayed", as the commodity is fundamentally supported by encouragingglobal supply and demand factors.
That is the view of Malaysian Palm Oil Association (MPOA) chief executiveM.R. Chandran, who said: "I do not consider the current stockpile of 1.5million tonnes high as Malaysia’s average palm oil monthly exports arebetween 1.1 and 1.3 million tonnes."
"If one were to compare this export figure of 1.3 million tonnes with thecurrent stocks of 1.5 million tonnes, the stockpile is not excessive atall," he told StarBiz in an interview.
The palm oil stock has been on the rise lately, exceeding thepsychological figure of one million tonnes to hit about 1.5 million inDecember last year " the highest level since the 1.495 million tonnesrecorded in February 2001.
Chandran pointed out that the local market always based the CPO pricing onthe psychological figure of one million tonnes in stocks.
"Once the palm oil stock exceeds the psychological figure, many industryplayers tend to panic and will try to sell (the commodity) at reducedprice levels," he said.
Some analysts maintained that although the local palm oil stockpile hadrisen, it only covered 1.3 months of exports, which was a 10-year average.By the same token, the world stock to usage ratio of palm oil this year isexpected to fall to 14.4% from 14.5% (reduced to 300,000 tonnes from500,000), indicating tightness in world palm oil supplies.
M.R. Chandran"Local players must change their mindset and try to look in the context ofglobal palm oil production," he said.
The world’s average production of palm oil is about 2.5 million tonnes permonth. "On a global basis, Malaysia is actually keeping just one-monthstock and not holding four or five-month stockpile," added Chandran.
Malaysia’s palm oil production is estimated at 14 million tonnes last yearwhile analysts forecast Indonesia’s production at about 12.2 milliontonnes.
According to Chandran, MPOA expects CPO spot price to climb back toreasonable levels at about RM1,400 per tonne by April or May compared withthe current price level of about RM1,285 per tonne, which is due to theseasonally weak demand from major importing countries like China, Indiaand Europe in the first three months of the year.
"We want to see competitive prices of between RM1,350 and RM1,450 pertonne this year based on planters' cost of production structure. Anythingabove the RM1,450 level will be a windfall for plantation companies,' hesaid.
On the supply factor, he said the current tight world edible oil supplieswould be able to lend support to edible oil prices, including palm oil.
'I believe the future of palm oil in terms of demand looks bright,especially with the trans-fatty acids (TFAs) issues which will help driveup US consumption for palm oil and with the anti-genetically modifiedorganisms (GMO) food stance in the European Union," Chandran said.
Datuk Haron SirajAbout 90% of soybeans from South America and more than 50% from the USwere GMO crops, unlike palm oil which was GMO-free, industry observerssaid.
Realising the impact of CPO prices on the plantation industry, thePlantation Industries and Commodities Ministry last month set up a "palmoil price monitoring committee", chaired by Deputy Minister Datuk AnifahAman, to look into the short- and long-term strategies for the commodity.
On the palm oil stock management, Chandran said: “In the short term, wewill be looking at a mechanism to blend palm olein with diesel to reducestock levels.
"The long-term plan is to set up a bio-diesel plant with a productioncapacity of 500,000 tonnes per year."
Other important issues to be addressed include the different importtariffs imposed by India on palm oil versus soyoil.
"India imposed a 45% import tariff on soyoil compared with 65% on palmoil. This puts soyoil at a price advantage of more than US$120 per tonneover palm oil, thus creating the perception that palm oil is inferior tosoyoil," he explains.
He added that the difference in import tariffs had resulted in palm oilnot being able to realise its intrinsic values or techno-economicproperties.
Malaysian Palm Oil Promotion Council chief executive Datuk Haron Sirajsaid: "In a high palm oil stock scenario, we must seriously consider newermarkets and new potential uses of palm oil such as in the biofuel industrywhich holds promising opportunities."
He said Malaysia had received a lot of enquiries on the potential purchaseof palm oil, especially from European countries that promotedenvironmental conservation and were currently reducing their consumptionof fossil fuels.
"The penetration into newer markets will also buffer against any potentialdecline (in demand from) major traditional palm oil importers," he added.
Analysts pointed out that the activation of credit facilities granted toRussia under the Palm Oil Credit Payment Arrangement would result in thecountry purchasing 500,000 tonnes instead of its annual average of 130,000tonnes.
Meanwhile, Mayban Securities in its latest sector outlook for 2005maintained its "overweight" stance on the sector, given the strongfundamentals surrounding the palm oil demand and not solely premised onthe expectation of higher CPO prices going forward.
"The increase in plantation acreage and production coupled with millingefficiencies are expected to drive earnings for plantation companies. Atcurrent (CPO price) levels, plantation companies would still enjoy healthymargins, given the average cost of production between RM600 and RM700 pertonne," the research unit said.
It added that the strong cash flow generated would be able to sustainattractive dividend payouts.
Diversification into downstream ventures among some plantation companieswill also serve to cushion the effects of the excessive fluctuation in CPOprices.
Mayban Securities has recommended a "buy" on PPB Oil Palms Bhd and KLKepong Bhd and a “trading buy” on Golden Hope Plantations Bhd, but placed"hold" calls on IOI Corp and Kumpulan Guthrie Bhd.