Published April 14, 2009

Rising palm oil prices kindle interest in plantation stocks

Inventories falling due to higher than expected demand, lower production

By S JAYASANKARAN
IN KUALA LUMPUR

	Email this article
	Print article
	Feedback

RISING global demand and a decline in inventories have pushed crude palm oil prices higher in a move that's rekindled interest in plantation stocks.

Moving again: Weakening US dollar, rise in crude oil prices encourage a switch to biofuels

Indeed, no less a figure than Lee Shin Cheng, the owner-chairman of IOI Corporation, thinks that prices could remain between RM2,600 (S$1,104) and RM2,800 per tonne for the rest of the year. Currently, it trades at around RM2,300.

'Actually I'm still bullish on prices but it's not good for prices to jump as high as they did last year,' Mr Lee was quoted as saying by the New Straits Times yesterday. In March last year, prices leapt to a record high of over RM4,500 a tonne.

Mr Lee noted that stock levels had fallen for four consecutive months. Government data support his contention. The latest figures from the Malaysian Palm Oil Board showed that palm oil inventories had fallen from 2.37 million tonnes in November - an all-time high - to 1.36 million tonnes by the end of March.

Most analysts seem to share Mr Lee's view but perhaps aren't as bullish. In an April 10 report, AmResearch, a unit of the Arab-Malaysian banking group, forecast RM2,500 a tonne for this year.

The improved outlook could symbolise a mood of slowly-growing optimism among various sectors in Malaysia amid a change in the political leadership.

Over the weekend, for instance, businessman G Gnanalingam, who owns and manages West Port, said that throughput - both exports and imports - at his port had increased 10 per cent in March from its low three months previously.

'The signs of recovery are there and what we need now is confidence,' said the businessman.

Tan Teng Boo, the managing director of fund management outfit icapital.biz, is even more bullish. 'We are expecting a V-shaped recovery and global markets are on the verge of a major reversal.'

This is probably a minority view where economists are concerned but the confidence in crude palm oil prices appears to be grounded in fact. One factor is much higher than expected demand coupled with lower production which has led to sharply falling inventories.

In addition, demand is expected to stay strong and, in the words of AmResearch, 'demand is traditionally greater in the period between May to September because of festivities in China and India'. This could prompt inventories to fall further to an estimated low of 1.3 million tonnes by the end of the year.

There are two other factors propelling the rise in prices. According to AmResearch, prices are also being fuelled by a weakening US dollar and a rise in crude oil prices which encourage a switch to biofuels.

All these factors have collectively rekindled analyst interest in plantation stock. Icapital's Mr Tan, for instance, likes Kuala Lumpur Kepong and Boustead while AmResearch has plumped for Kuala Lumpur Kepong and IOI Corporation, among the big-cap stocks and IJM Plantations for investors who prefer the smaller firms.