WILL PALM OIL stocks be able to halt their slide down the slippery slope caused by oversupply and softer demand? Crude palm oil (CPO) production growth, which overshot increase in demand so far this year, has caused prices to drop by nearly a third from its peak in February. Predictably, this has dragged down prices of palm oil plantation stocks. However, prices have bottomed out at around RM2,700 ($1,108.8) per tonne in October – instead of the RM2,500 per tonne as predicted by RBS Securities, who used to rate this sector “underweight”. By end of this week, prices have reached around RM3,000 per tonne.

 

Now, several positive factors are emerging that might encourage investors to turn bullish on palm oil stocks. “We currently consider the upside and downside risks to the price of CPO to be finely balanced,” states RBS analyst John Rachmat in his Nov 29 report, explaining his reasons for upgrading the sector to “neutral”.

 

The first factor is the weather, specifically, flooding brought about by high rainfall because of the La Nina effect, which might cause production to drop. Just as an indicator, the most recent La Nina in January and February this year, caused production to drop by up to 40%. Typically, a hectare can yield between 1.8 and 2 tonnes of so-called “fresh fruit bunch” (freshly harvested palm oil fruits, before processing). During the last La Nina, this measurement fell to between 1.15 and 2 tonnes per hectare.

 

However, Rachmat cautions that the market view over this potential drop in supply has perhaps gone overboard as his channel checks with Indonesian planters is showing no indications of flooding so far. Nevertheless, there is still such a risk, which has the effect of putting a floor to further price declines in crude palm oil, he notes.

 

Still on the positive side, if OilWorld, an industry research bureau, is correct, global demand for crude palm oil is expected to grow over the next 12 months by 6.8% on year. By contrast, global production is only expected to increase at a slower pace of 4.9%. According to forecasts by OilWorld, the biggest demand growth will come from Indonesia, with an expected demand of 6.82 million tonnes for 2011-2012, up 12.4% compared to the likely 6.07 million tonnes for 2011. Malaysia’s consumption is also expected to grow strongly: up 15.9% between 2011 and 2012, reaching 2.28 million tonnes.

 

Similarly, Rachmat is not “entirely convinced” that such bullish demand projections will materialise, as the looming global recession is likely to douse strong consumption growth in commodities -- including crude palm oil.