CPO price falling to dip below RM3,000 per tonne due to rising inventory and decreasing demand

PETALING JAYA: Crude palm oil (CPO) price is likely to fall below RM3,000 per tonne over the next two weeks due to rising inventory and decreasing demand, traders and analysts said.

The last time CPO three-month futures was below the RM3,000 per tonne level was on Oct 21, 2010 at RM2,990. Since then it had been climbing to reach a peak of RM3,955 on Feb 11.

The CPO three-month futures price had been on a declining trend for the past five months to close at RM3,029 per tonne, down RM11 yesterday.

Malaysia's CPO stock and production, which have been climbing since February, are playing their part to further suppress the CPO price. Malaysia is the second largest palm oil producer globally after Indonesia.

The latest numbers according to the Malaysian Palm Oil Board (MPOB) monthly statistical data for May showed month-on-month palm oil stocks rose nearly 15% to their highest in 16 months as production overtook exports.

Palm oil stocks in May rose to 1.92 million tonnes from 1.67 million tonnes a month before a level unseen since January 2010 while CPO production shot up by 13.74% to 1.74 million tonnes.

Interband Group of Companies senior palm oil trader Jim Teh expected the CPO price to scale back to around RM2,800 per tonne within the next two weeks as demand was sliding due to the “expensive” CPO price and higher inventory.

“The current CPO price is considered expensive for physical' buyers to keep high inventory on the commodity. They would just buy the CPO as and when they needed it,” he said, adding that besides demand, paper trading of CPO also helped to ramp up its price.

Teh said the healthy production levels in the past three months were supported by good weather that resulted in robust fresh fruit bunches yields.

Nevertheless, Teh argued that even at RM2,800 per tonne, the margin was still good as the production cost of CPO per tonne hovered around RM1,200 to RM1,500.

“It will be a good correction and a breather for the physical buyers to come in and buy CPO as well as to clear the mounting palm oil stock,” he told StarBiz, adding that CPO prices had been rallying since 2006.

The decrease in CPO prices would also very much depend on the latest level of inventory where MPOB is expected to release its June monthly data early next week.

Meanwhile, IJM Plantations Bhd chief executive officer and managing director Joseph Tek Choon Yee remained optimistic that the average CPO price for calendar year 2011 would be higher than last year's RM2,745 and there was still room for it to average at RM3,000.

“The widening soy bean-palm oil discount, presently at US$237 will make palm oil very attractive for soy bean oil buyers such as India. This will certainly lend support to subsequent purchases,” he said.

On rising stockpile, Tek said CPO backed by fresh fruit bunches production was on the rise as the oil palms were recovering from the double whammy weather effects arising from El Nino and La Nina last year and early part of this year.

“This production figures leading toward rising stockpile and lower crude oil prices appear to set some level of panic' selling and lends support to opportunity buying,” he said.

Another analyst, sharing similar views with Teh, also anticipated that the CPO price would dip below the RM3,000 level.

“The inventory level is just quite high right now. Maybe retailers are waiting to buy just before the festive season starting in August.

“The declining CPO prices were also influenced by lower soy bean prices,” he said.

Muslims around the world will start fasting for the whole of August before celebrating the Aidil Fitri.

Palm oil expert Dorab Mistry, director of Godrej International Ltd, was quoted by Bloomberg yesterday as saying the velocity of CPO production was unbelievable.

In April, Mistry revised his earlier CPO forecast given the anticipation of higher global palm oil production this year.

He expected the RM3,000 per tonne price support to be broken and push CPO prices to trade even lower going forward.

OSK Research, which analysed the CPO futures market in June for a few times over a period of three weeks, said that its technical landscape had deteriorated at every subsequent analysis.

“Our major talking point last month was the bottom point of the “non-classical hammer”, or the RM3,163 per tonne level. This is because the RM3,163 per tonne level has been the support floor for the market's six-month old sideways trend.

“However, this crucial low was violated last week and it looks like this violation of the key RM3,103 per tonne support level has confirmed a breakdown,” it said in a report earlier this week.

But, the research house said since the violation of this level was not aggressive enough, it could not tell for sure at this point of time if the RM3,163 per tonne level had been decisively taken out.

“Hence, to confirm that the lowest point of the “non-classical hammer” has really been violated, we would have to wait until prices fall below last week's low of RM3,031 per tonne level,” it said.