2011 CPO prices to average RM3,600 per tonne

Posted on January 19, 2011, Wednesday

KUCHING: The president of Asian Agri Group, Datuk Yeo How recently gave his views on the plantation sector with a bullish outlook on crude palm oil (CPO) prices. In its research report, Hong Leong Investment Bank Bhd (Hong Leong Research) said that the mooted CPO average price was RM3,600 per tonne. For that matter, the research house said Yeo believed that CPO prices had the potential of rallying beyond the RM4,000 per tonne mark in the near term, albeit with greater price volatility relative to 2010. 

This view was underpinned by the record-low inventory levels for several major oilseeds and grains largely due to adverse weather conditions. To elaborate further, the oilseeds and grains in question were soybean, sunflower oil and CPO. While the weak corn and soybean crop would have already been factored into the current high prices, Yeo believed that prices of soybean would soar higher should soybean crops come below expectations and hence result in higher CPO prices. Nevertheless, beyond the first half of this year, while Yeo believed that CPO output would recover from the second half of this year onwards, it was important to note that the quantum of the crop recovery re-mained questionable and this would not soften CPO prices should crop recovery be weak.

In other developments, Hong Leong Research said Yeo’s views also included both demand and prices to likely strengthen post Chinese New Year as China would likely begin inventory replenishing given the low inventory level and as the industry started to move away from seasonally weak demand during the winter months.

While there were concerns that skyrocketing commodity prices might result in demand rationing for CPO, Yeo believed that this was unlikely to happen at this juncture given that prices of other oilseeds had increased substantially as well. Notably, the research firm also highlighted Yeo’s views that the current high commodity prices were also supported by the flush of liquidity and the weak US dollar.

Furthermore, it also presented Yeo’s beliefs that margins for the refining business would remain tight amidst the current high CPO prices for the downstream segment. On the issue of biodiesel viability, Yeo said mandates from various countries should help cushion biodiesel consumption although it was currently not economically viable on a free market basis.

There were also risks present in the form of global vegetable oils (including CPO) production coming in higher than expected, which would result in lower-than-expected CPO prices and also demand rationing by certain oil-consuming countries. The effects of this would be apparent when vegetable oil prices skyrocket to certain levels, which would bring down consumption for vegetable oil. 

Hong Leong Research noted that there was still plenty of upside to plantation stocks at the current share price levels as those under its coverage were still trading below two-year historical forward price-to-earnings mean. Its top picks on the sector were IOI Corporation Bhd, Sime Darby Bhd and Tradewinds Plantation Bhd with target prices at RM6.62 per share, RM10.76 per share and RM4.60 per share respectively.