Published May 25, 2009

CORPORATE FOCUS

Palm oil prices expected to remain volatile

Industry outlook still uncertain despite recent price surge

By OH BOON PING

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DESPITE the recent recovery in crude palm oil (CPO) prices, industry watchers said that the volatility seen last year looks set to remain, while the medium-term outlook remains uncertain.

To the listed planters here, this is important since some saw their bottom lines hit by the lower selling prices seen in previous quarters.

For example, Indofood Agri Resources reported a 55 per cent plunge in its net profit to 240 billion rupiah (S$33.7 million), while turnover dived 30 per cent for the three months ended March 31, 2009.

Golden Agri saw a 93.7 per cent plunge in net income to US$8.6 million. First Resources also suffered when its earnings slumped by 81.6 per cent to 57 billion rupiah over the same period.

All the planters were hit by sharply lower price levels as average international CPO (CIF Rotterdam) price plunged to US$574 per tonne in the first quarter - about half the average price of US$1,142 a year ago. The trend reversed slightly in the recent months, as lower-than-expected soybean crops from Argentina and soybean planting intentions by United States farmers drove prices up, said CIMB in a report.

Besides that, the demand for palm oil from India was stronger than expected, while palm-oil supplies from Indonesia and Malaysia were dented by adverse weather and biological tree stress.

But far from popping the champagne, market watchers pointed out that much still depends on the final soybean harvest from Argentina, actual soybean planting by US farmers and palm-oil production in the months ahead.

And for Macquarie Research, in particular, it sees CPO fundamentals deteriorating 'from May onwards, as excitement on low inventories in Malaysia starts to wane'.

The research house thinks that the strong export demand that was seen in Q1 is unlikely to be sustained due to inventory build-up in consuming countries such as India and the narrowing CPO price discount relative to other oils.

'We expect the CPO price to revert to the US$500 per tonne level in coming months,' Macquarie said.

Meanwhile, there are some concerns that palm-oil production may end up weaker due to reduced fertiliser application by smallholders a year ago because of then-high fertiliser prices.

In a report, Goldman Sachs analysts said that long-term supply growth from Indonesia may also be below market expectations if 'smallholder estates have lower yields from poor upkeep standards'.

In the longer-term, demand is expected to stay firm, while CPO's status as the cheapest edible oil should help it to ride out any downturn.

Indeed, the price-substitution effect should trigger demand to switch out of alternative commodities into CPO. Macquarie is more positive on CPO prices next year, along with a forecast economic recovery.

Among the planters listed here, Wilmar appears to be the most resilient as it bucked the trend of profit plunges to report higher first quarter net earnings.

This is partly because of the group diversifying its business away from plantations towards other segments such as oilseeds and grain products - a move that should continue to curb its earnings volatility in the long run.