Published August 14, 2008

Crude palm oil plunges 40% from its Q1 peak

Analysts divided on whether the price cycle has run its course

By PAULINE NG
IN KUALA LUMPUR
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THE crude palm oil (CPO) price has plunged more than 40 per cent from its peak in the first quarter of this year, posing the question of whether the price cycle has run its course.

Further growth: The crude palm oil inventory is expected to rise, as Indonesia has increased planting

Views were mixed. Some analysts believed the current dip to be a temporary hiccup. But others were convinced that the sector will be underweight for a while.

One of the mainstays of the Malaysian market over the past few years, plantation stocks have featured prominently on the losers' list in the past month as CPO price tumbled. From a March high of RM4,486 a tonne, the prices is now about RM2,600 (S$1,105).

The initial correction was largely sentiment-driven, triggered by the correction in the crude oil price which has skidded from more than US$140 to US$113 a barrel. The continuing correction is more fundamentally driven, caused mainly by a mismatch between growing supply and falling demand.

The CPO inventory - already at record two million-plus tonnes - is expected to rise, because of the planting of 350,000 ha a year in Indonesia since 2000. The world's biggest CPO producer is expected to accelerate output next year from 18.8 to 21.3 million tonnes - an increase of 13 per cent compared with an average 8 per cent rise over the past two years, according to AmResearch.

Malaysia's CPO production is expected to rise 11 per cent to 18 million tonnes next year, compared with an average annual jump of 4 per cent over the past four years.

'People forget that CPO is a commodity and that commodities are volatile and only do well when there is strong demand,' said CIMB Research analyst Ivy Ng, who downgraded the sector a month ago to bring its valuations more in line with the market.

Factors such as lower bio-fuel targets in developed economies and higher taxes on planters' earnings are further reasons to downgrade the sector, as are slowing demand from China and higher inflation, which will lead to less demand for downstream products.

'The bullish run has gone on for three years and people were concerned prices were not sustainable,' said Aseambankers analyst Ong Chee Ting.

In a write-up on the sector, AmResearch said that it believes that the CPO price cycle is coming to an end, and plantation earnings will peak this year before declining 15 per cent in 2009.

Others disagreed. In the short term, the sector may not look exciting because of higher inventory but supply is likely to fall once peak production ends in September-October, said an analyst with a foreign stockbroking firm.

'I don't think it's the end,' said this analyst. 'Soft commodities should re-rate upwards in the longer term of 12-18 months. It's a hiccup, but the general trend is up.'

The analyst projected an average CPO price next year of RM3,300 a tonne. CIMB's Ms Ng put this year's average at RM3,350, tapering to RM3,000 in 2009.

Compared with 2001's price of RM600 to RM700 a tonne, the sector's overall prospects are obviously still good, cost increases over the years notwithstanding. The production cost of more efficient planters is estimated at RM800 to RM900 a tonne.