Plantation stocks still lack push factor

From The Edge:

After an initial strong showing in early trading, plantation counters ended the day mostly lower, and leading industry observers said the sector is expected to remain weak in the near term, as the recovery in demand and prices are not expected anytime soon.

"There is still no upside potential in the near term for this sector, and we would advise investors to stay on the sidelines for now until there is better guidance as to the direction of CPO (crude palm oil) price movement.

"We think that the current price level of above RM2,000 per tonne is unsustainable as this price is being supported by production shortfall in Indonesia," said Alvin Tai, a plantation sector analyst from OSK Research.

In the latest research report, OSK said the shortfall in supply led to inventory declining faster than expected, with Feb 2009 inventories dropping to only 1.56 million tonnes or a 14.7% decline month-on-month (m-o-m).

The lower-than-expected inventory was mainly due to lower production, which fell by 10.7% and higher domestic consumption that went up by 31.9% m-o-m despite weaker exports, which declined 7.2% on a monthly basis.

Tai said the research house was keeping its projection of CPO prices to hover at between RM1,500 and RM2,100 per tonne. The closing price yesterday was RM2,011 per tonne, down RM11 or 0.54% from last Friday.

Another industry observer from a local research house said the focus was now on the demand side of the equation, where recovery in prices was not expected anytime soon.

"There are signs that while palm oil demand for food production is holding up, industrial use of the commodity is still sluggish," he said.

OSK's Tai remained concerned that palm oil prices could come under pressure when Indonesia's production recovered, which could be as early as second quarter (2Q09) of this year.

Moreover, Malaysian production should be exiting its seasonal low next month. The speed of mandatory biodiesel implementation holds the key to preventing a collapse in palm oil prices.

Bio diesel capacity still needs to be developed due to Malaysia's high palm oil exposure, similar to how Brazil which is able to divert about half of its sugar output to make bio diesel. Malaysia is nowhere near that. Crude is the most stably priced energy product out there.

Lack of alternatives for the use of palm oil will cause its price to fluctuate and be more volatile than crude oil. As hyped up as palm oil is as a product, it still lacks some major upstream production alternatives. Malaysia needs to take up this responsibility as one of the major producers of palm oil.

Not only does bio diesel capacity need to pick up, but it must be able to be able to scale its output from high to low with as little cost as possible.