Optimism returns to palm oil sector

by **Cals** Thu 02 Jan 2014, 09:55

Business & Markets 2013

Written by Levina Lim of theedgemalaysia.com

Thursday, 02 January 2014 09:39

KUALA LUMPUR: After a difficult year for palm oil players, plantation analysts are now confident of the sector, forecasting average crude palm oil (CPO) prices to range between RM2,600 and RM2,800 per tonne in 2014.

Alan Lim Seong Chun, senior research analyst at Kenanga Investment Bank, attributed the bullish outlook for the sector to declining palm oil inventories in the coming months, positive regulatory mandates and climate changes affecting supply.

“Inventories in November have peaked and should decline for the next four months up to March 2014, which should allow the CPO price to increase up to RM2,900 per tonne in 2014.

“Additionally, Argentina had increased the mandatory use of biodiesel to 10% from 8%. This is expected to impact soybean oil prices positively and indirectly result in better CPO prices,” he told The Edge Financial Daily.

The industry has seen a series of regulatory mandates in various countries which has been a boon for the sector.

This year, Indonesia will increase the mandatory use of palm oil in biodiesel and push for three million tonnes of biodiesel (B100) consumption.

It has been reported that Malaysia may raise its mandatory biodiesel blend for palm oil to 7% from the current 5%.

In 2013, CPO futures averaged RM2,418 per tonne. They fell to a low of RM2,167 per tonne during the year and closed at RM2,660 on Tuesday.

Plantation analysts had a bleak outlook on CPO prior to October last year. This changed with higher biodiesel demands and supply shocks to lauric oils such as coconut oil, following typhoon Haiyan in the Philippines, which gave a boost to CPO prices.

Palm oil industry expert Dorab Mistry is said to have forecast that the CPO price will trade from RM2,400 per tonne to RM2,600 per tonne in the coming months, with the possibility of climbing to RM2,800 per tonne on expanded demand for palm biodiesel in Indonesia.

According to Lim, poor climate conditions such as the possibility of El Nino in the US could push the CPO price above RM3,000 per tonne.

“If the El Nino really occurs in the second half of 2014, we see a high potential that the CPO price may surge above RM3,000 per tonne because this will lead to consecutive months of dry season”, he said, adding that this could cause up to a 30% decline in palm oil production in areas affected by the El Nino.

According to Alvin Tai, analyst at RHB Research Institute, fertiliser costs — which make up about one third of a plantation company’s production costs — will be significantly cheaper following the potash cartel break-up in the West, contributing to a more positive year ahead.

“From October last year, composite fertiliser costs — which consist of potash, ammonia and rock phosphate — went down by 23% per hectare,” he told The Edge Financial Daily.

Arhnue Tan of Alliance Research, pointed out that while the outlook for CPO this year is likely to be more optimistic than in 2013, healthy supplies of competing oils will reduce demand for palm oil and cap the rise in CPO prices.

“Stronger supply of substitute oil will result in less demand for palm oil in terms of volume. Soybean oil is a strong competing oil and the supply of South American soybean crops should be healthy in the second half of 2014,” she told The Edge Financial Daily.

“Current estimates and weather forecasts indicate a healthy increase in the supply of soybean”, Tan said. This together with the risk of lower palm oil exports are the key reasons for Alliance Research’s conservative CPO forecast of RM2,600 per tonne for 2014 compared to other research houses.

Tan said as palm oil prices had fallen to as low as RM2,200 per tonne or lower in 2013, most major merger and acquisition opportunities had been taken up.

“But you never know because companies such as Felda Global Ventures Holdings Bhd may still acquire more land and we may still see more transactions in countries like Africa,” she said.

Bharat Joshi, investment manager at Aberdeen Asset Management Sdn Bhd, said despite the more positive outlook for the plantation sector in 2014, he is still cautious on the sector.

“I think sectors that will do well this year will be those that had lagged behind the market last year, and the plantation sector is one of them.

“However, I’m not going to give you a bright picture because I feel quite cautious about 2014. We’re going to watch rising costs very carefully — labour costs are going to be a challenge in the plantation sector due to the lack of workers willing to work in plantations,” he said.

This article first appeared in The Edge Financial Daily, on January 02, 2014.