11/08/2008 (The Edge Daily), Kuala Lumpur - Crude palm oil’s (CPO) near-term outlook remains bleak following tumbling of prices last week amid a global selldown in commodities, indicating that the sector is heading for a downcycle.
Although sentiments have become increasingly bearish for the plantation sector, analysts said the sharp selldown in the commodity was rather unexpected.
“We were surprised at the rate CPO prices have come down. Prices of palm oil may ease to the RM2,500 level earlier than expected as palm oil appears to be falling with the price of crude oil,” a plantation analyst said.
The benchmark October CPO delivery on the Bursa Malaysia Derivatives fell RM66 to RM2,779 a tonne last Friday as price of crude oil remained sluggish. Crude oil for September delivery on the New York Mercantile Exchange traded at US$118.05 as at 5.45pm last Friday.
The analyst initially forecast that the downcycle for plantations would only kick in towards the end of next year or even at the start of 2010.
“However, it appears that the downtrend has started earlier. We find that CPO prices would be trading at a low, unless crude oil price rallies.”
“Prices cannot remain high at all times and people should not be so afraid if the CPO goes into a downcycle, as this is all part of the commodity cycle,” TH Plantations Bhd managing director Datuk Rashidi Omar told The Edge Financial Daily.
According to industry consensus, the CPO is expected to trade lower only from 2010, as new plantings in the past two years would be coming onstream. Indonesia also expects its plantings to come onstream in the next two years, boosting supplies of palm oil in the market.
“With the speed of CPO prices coming down, it would not be surprising if CPO price could eventually trade as low as RM2,000 a tonne. This is also taking into consideration that crude oil would be trading lower and an ease in demand for edible oils,” the analyst said.
Analysts have even forecast the price of crude oil to dip to US$100 a barrel. The plantation analyst has downgraded the sector to an underweight.
“Most of the plantation stocks under our coverage are at a sell call, save for IOI Corporation Bhd and IJM Plantations Bhd.”
“We favour these stocks as both companies maintain a selling forward policy for its CPO. These companies could be better off than plantation firms which are selling palm oil at spot prices,” the analyst said.
He said integrated plantation plays like IOI Corp could weather a decline in CPO prices as its earnings stream were diversified.
The contrarian view opines that CPO prices would trade above RM2,500 despite the selldown last week.
Foreign research firm Credit Suisse maintains an overweight call on the sector as palm oil exports would be on a rebound on higher export figures to China.
“Year-to-date, Malaysian palm oil exports to China had risen 19.1% year-on-year (y-o-y), while exports in July grew 50.1% and 68.2% month-on-month.
This could be the start of the Malaysian palm oil export recovery,” Tan Ting Min said.
Credit Suisse maintains its overweight call on plantation stocks and maintains buy calls on Kuala Lumpur Kepong Bhd (KLK) and Sime Darby Bhd.