CPO price to remain firm on lower output

Email

Facebook 3

PETALING JAYA: Crude palm oil (CPO) prices are expected to stay firm this year as the dry weather crimps production, but valuations need to be more compelling before investors jump back in, said analysts.
CIMB Research said in a report that it continued to take a “neutral” view of the palm oil sector, as regional planters were currently fairly valued.
It expects CPO prices to be range-bound in the second and third quarters of this year before picking up in the later part of the fourth quarter.
The research house believes that interest in the sector remains strong, but that some investors might have trimmed their holdings because of valuations.

“They appear keen to reinvest in the sector when valuations are more attractive due to their positive long-term view on CPO prices.
“We continue to prefer Singapore and Indonesia-listed planters which offer better value like First Resources, Astra Agro Lestari, Ta Ann Holdings Bhd, SIMP and Sampoerna Agro,” CIMB Research said.
CPO futures have slumped 18.5% from a peak of RM2,901 per tonne this year to RM2,364 per tonne as at 5pm yesterday, its lowest level since October last year.
RHB Research has an “overweight” call on the sector, saying CPO prices were set to be lifted by weak production amid the dry weather.
“June palm oil production will likely decline month-on-month in West and East Malaysia as well as Sumatra, which is not typical, caused by the 12-month dry weather impact from last year.
“We believe the weak production trend will likely persist for several more months and may affect the upcoming peak crop season,” the brokerage explained.
It said palm oil production in July may be further hit by lower productivity during the fasting month.
“If demand is strong enough, then palm oil stockpiles could start to decline from the current level, or four to five months ahead of the norm.
“The key palm oil-producing region of Sandakan in Sabah is currently experiencing unusually dry weather, resulting in oil palm trees showing signs of stress and lower fresh fruit bunch (FFB) weight.
“This is evidenced by the double-digit decline in East Malaysia’s production numbers.”
And while demand from the key edible oil-consuming countries of India and China has been soft, RHB Research sees them commencing restocking activities soon.
“We remain optimistic on the sector, as valuations are undemanding overall.
“Our current palm oil price assumptions remain at RM2,700 per tonne for 2014 and RM2,900 per tonne for 2015,” RHB Research said.
CIMB Research expects the widely-predicted El Nino, which could fully develop by the third quarter, to have a lagged effect on FFB yields up to 24 months later, and the potential drop in production will largely depend on the severity of the El Nino-induced drought.