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MooFassa
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Posting #1: Wed Aug 27th, 2008 09:02 |
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MAL: Plantation - High supply to stay and would cap price upside
Plantation
High supply to stay and would cap price upside
We attended the first palm oil industrial seminar after the sharp price correction and the most notable onservation was the industry players are now bearish about the price outlook as compared to super bull forecasts during the Palm Oil Conference held just six months ago, i.e. Feb 08.
Key highlights:
Significant change in price outlook. Just six months ago industrial players were forecasting crude palm oil prices at well above RM3,000/tonne with some going as high as RM4,500/tonne. But at this conference, officially or unofficially, none of the players are looking at prices rebounding to RM3,000 anytime soon. Key pressure is coming from better than expected edible oil supplies and demand destruction due to high prices. However, no speaker wanted to commit to any price forecast at this point of time.
Price forecast during Palm & Lauric Oils Conference in Feb 08
Note: based on exchange rate of RM3.19:US$1, * based on average of two price ranges
Source: POC 2008
High supply to stay. The high supplies are not only of palm oil, but also from other edible oils such as soybean, rapeseedl and sunflower oils. Based on checking the ground, high production cycle for oil palm trees will likely be longer than expected. High production is likely to continue into November, instead of our earlier expectation of October. This is because of good weather and also better fertiliser input by the producers. Good weather also leads to much higher production of rapeseed and sunflower (?) seed oils as well. As all the edible oils can substitute for each other, higher production from any of these crops will not be positive for the price of all edible oils.
Demand destruction. Demand destruction during the high production season explains the sharp price correction. Based on the estimates of Mr. Dorab Mistry, the demand for food is estimated to have fallen by 1m tonnes with another 0.5 m tonnes loss of demand from energy sector. This demand loss is only likely to come back at the right pricing. Although demand for palm oil has picked up recently, this was at the expense of other edible oil. Thus, stronger CPO exports are not likely to boost CPO price.
More government interventions. More and more stringent regulation imposed in the EU market on the import of products for chemicals, pharmaceuticals and cosmetics could lead to higher cost of doing business for the palm oil products exporters. And reading from the speech by the Minister of Plantation Industries and Commodities, we are not likely to see the withdrawal of windfall tax on palm oil producers anytime soon. The most disappointing event would be no announcement or direction given on the Biofuel Policy in Malaysia, which was expected to mandate a 5% blend into fossil diesel. This could potentially lead to withdrawal of 0.5m tonnes of palm oil from its current high inventory of 1.98m tonnes.
Key factor to watch to turn the bear into small bull. Weather holds the key to the harvesting in USA and India. Any negative news on early frost in USA or early stop of monsoon season in India will dampen supply outlook. This will be positive for edible oil prices. Crude oil price is the next big factor to watch. Crude oil price sets the base for the edible oil price from the aspect of biofuel. One of the speakers, Mr John C. Baize (from John C. Baize and Associates, USA) presented an interesting table on the impact of changing petroleum values on energy value of agricultural commodities. This energy value could potentially form the base for the edible oils.
Impact of changing petroleum values on energy value of agricultural commodities
Source: John C. Baize and Associates
Maintain UNDERWEIGHT on the sector.
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