CPO price seen below RM2,700 per tonne, higher than last year

by hanim adnan

analysts are bullish that the CPO average price this year will be in the RM2,500-to-RM2,800-per-tonne range, which is much higher than last year’s average of RM2,371 per tonne.

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PETALING JAYA: The price of crude palm oil (CPO) will likely be capped below the RM2,700-per-tonne mark this month, following uncertainties over rising palm oil inventories, the speed of the biodiesel mandate implementation in Indonesia and Malaysia, as well as the looming El Nino weather constraint.
Despite these uncertainties, market analysts are bullish that the CPO average price this year will be in the RM2,500-to-RM2,800-per-tonne range, which is much higher than last year’s average of RM2,371 per tonne.
Kenanga Research, in its latest sector update, has reiterated its “overweight” rating on the plantation sector, with its average CPO price forecast unchanged at RM2,800 per tonne this year. In the first quarter of this year, the CPO average price increased 16% year-on-year to RM2,693 per tonne.
“As the CPO price is usually the key earnings driver for planters, we believe that first quarter 2014 will likely be a good quarter with earnings growth of at least 20% for planters,” said Kenanga Research analyst Alan Lim Seong Chun.

The research unit’s overall top pick is TSH Resources Bhd, which stands to benefit more from the recent CPO price increases due to its high fresh fruit bunches growth. Another favourite is Sime Darby Bhd, given the group’s attractive valuations among the other plantation big caps.
At the same time, there is a 70% chance that the El Nino will occur this year. According to Australia’s Bureau of Meteorology forecast last week, the climate models surveyed by the bureau suggests that an “El Nino development is possible as early as July”.
Meanwhile, RAM Ratings has revised its CPO price forecast upwards to between RM2,500 and RM2,600 per tonne this year, from its earlier forecast of between RM2,300 and RM2,500 per tonne.
It said in its inaugural quarterly CPO price outlook publication yesterday that the revised price forecast was due to weather-related supply contraints in the first half of the year.
RAM Ratings expects CPO prices to remain firm in the second quarter of 2014 between RM2,650 and RM2,750 per tonne. “Notwithstanding weather concerns, we expect prices to trend lower in the second half of this year, as the industry moves into its peak production cycle,” it added.
The rating agency said the probability of CPO prices dipping below the forecast range for 2014 is deemed to be low, given that additional domestic demand for CPO as feedstock for biodiesel production in Malaysia and Indonesia could result in reduced exports to the world market, providing support for CPO prices going forward.
In line with the implementation of the B7 (7% CPO content) biodiesel mandate in Indonesia, Pertamina, the state-owned oil and natural gas company, has called for tenders for around five million tonnes of CPO for this purpose in 2014 and 2015.
Meanwhile, Malaysia is expected to fully enforce its B5 mandate this July, which could take up 500,000 tonnes of CPO per annum.
While the thin premium of soybean oil to CPO currently may encourage users to switch to the former, CPO prices could see a further uptrend should the effect of the dry spell earlier in the year be more pronounced.