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Volatile crude palm oil prices and stockpiles likely to impact profits

Publication Date : 13-08-2014

 

The fortunes of oil palm plantation companies in the second half of this year are uncertain given the volatile crude palm oil (CPO) prices amid escalating domestic palm oil stockpile, which is slated to re-visit the historic high of two million tonnes by year-end.

CPO futures is currently trading at a one-year low at 2,190 ringgit (US$686.12) per tonne level while the end-July palm oil stocks stood at 1.68 milion tonnes.

Based on historic records, the next few months is expected to see high production of CPO and analysts expect the stockpile to hit 1.8 million tonnes by the end of this month.

Analysts have pegged CPO price to trade between 2,100 ringgit ($657.93) and 2,400 ringgit ($751.92) per tonne for the rest this month.

“But nobody dares predict the price beyond the next three months because there could be some catalyst to increase demand such as the government’s initiative to implement the nationwide bio-diesel mandate,” said an analyst.

The mandate is under the B-5 programme where 5 per cent of palm oil methyl ester will be required to be added on diesel.

Among plantation companies, a mere 100 ringgit ($31.32) increase in the CPO price per tonne could translate into additional “hefty” contributions to group profits.

Sime Darby Bhd had said that every 100 ringgit ($31.32)  per tonne change in the CPO price could result in an “addition or reduction of 250 million ringgit ($78.31 million)” to its group profit.

While for Felda Global Ventures Holdings Bhd (FGV), every 100 ringgit ($31.32) rice would result in an addition or reduction of 100 million ringgit ($31.32 million).

However, despite the hazy earnings outlook for planters in the second half of this year, Kenanga Research believes the upcoming quarter-two result season in end-August should not see any significant negative surprises for the plantation sector.

It expects most plantation companies’ second quarter earnings results due end of this month to meet consensus estimates.

“This is because the first half CPO price at 2,633 ringgit ($824.78) per tonne was close to consensus average CPO prices at 2,650 ringgit ($830.11) per tonne,” the research unit said in its latest plantation report.

“Additionally, we expect at least 20 per cent earnings growth year-on-year (yoy) for planters due to better CPO prices (+11 per cent yoy) and higher CPO production (+15 per cent yoy).

“As a result, we do not expect any significant downside in planters’ share prices in the near term,” said Kenanga Research.

Kenanga Research has reiterated a neutral call on the plantation sector with both 2014-2015 average CPO price forecasts unchanged at 2,500 ringgit ($783.12) per tonne.

Yesterday, most plantation stocks on Bursa Malaysia closed lower on bearish outlook with Kuala Lumpur Kepong 10 sen lower at 23.70 ringgit, while Felda Global Ventures Holdings Bhd lost two sen to 3.97 ringgit, Sime Darby Bhd eased two sen to 9.49 ringgit and IOI Corp was unchanged at 5 ringgit.

Meanwhile, Singapore-based Rabobank food and agribusiness research and advisory head Pawan Kumar said CPO prices may be pressured due to subdued demand as well as the easy availability of other vegetable oils.

He said at a briefing here that domestic palm oil stocks could decline after October as palm oil traders did not like to hold on to inventory.

“We’re looking at 2,400 ringgit ($751.80) to 2,500 ringgit ($783.120 per tonne average for this year; now is the best time to buy,” Pawan said, adding that Rabobank had a “fairly neutral” view on CPO prices this year.

This is in contrast to soybean, where prices are expected to fall to $1,020 per tonne in the fourth quarter from $1,200 per tonne in the current quarter.

Pawan pointed out that plantation firms should keep an eye out for an El Nino alert this year as “this weather phenomenon would have a negative impact on production by 2 per cent-15 per cent next year.”

In the case of a severe El Nino occurrence, then this would be positive for CPO prices next year, he said.

Pawan expects CPO prices to trade in the range of 2,600 ringgit ($814.45)  for the first quarter next year and 2,700 ringgit ($845.77) in the second quarter. CPO prices fell to the lowest year-to-date on Aug 11 to 2,177 ringgit ($681.94) per tonne, an 18.13 per cent drop.

Meanwhile, CIMB Research has projected CPO price to trade in the lower range of 2,100-2,400 ringgit ($657.82 - 751.80) per tonne for the remainder of this month.

“We project palm oil stocks in Malaysia to begin their seasonal climb, rising 9 per cent month-on-month to 1.84 million tonnes, driven by higher production and weaker exports due to competition from other edible oils,” said the research unit in its plantation report.

Over the past month, the key bearish factor, in the form of higher global oilseed supplies, had dampened soybean and rapeseed prices, which in turn, had depressed CPO prices as they competed for market share, said CIMB Research.

The bullish factors supporting CPO price have weakened as weather experts recently downgraded the probability of El Nino and biodiesel progress in Indonesia.

Furthermore, the research unit said: “There may be downside risk to our 2014 average price forecast of 2,700 ringgit ($845.77) per tonne as average CPO price achieved in the first seven month of 2014 was only 2,577 ringgit ($807.24) per tonne.”

Hence, CIMB Research believes the CPO price would need to stay attractive against other edible oils in order to boost exports so that palm oil stock levels in Malaysia and Indonesia will remain manageable.

 

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