CPO prices very near bottom

Source TheStar

KUALA LUMPUR: Crude palm oil (CPO) futures, which have fallen sharply recently to the RM1,800-level, are now very near the bottom, says OSK Investment Research.

In a research note issued on Monday, it said CPO price had averaged RM3,223 per tonne this year and the 2008 average would be quite close to its average assumption of RM3,150 per tonne.

“We believe CPO prices are now very near a bottom,” it said, adding prices had fallen back to the RM1,800 level, which is not far from the RM1,400 to RM1,500 in 2005 where the last up-cycle started.

At 11.15am on Monday, CPO price for third month delivery was down RM8 to RM1,765 while light crude oil rose US$2.62 to US$80.82.

OSK Research said that RM1,400 to RM1,500 was also the price level CPO was at before the biodiesel factor came into play and currently biodiesel is economically viable.

As such, local biodiesel plants have started to produce and will be ramping output up in the months ahead.

The research house said planters, especially the smaller ones, had started to cut back on fertiliser application due to the current low CPO prices and still expensive fertiliser.

Fertiliser prices have started to soften in tandem with the decline in crude oil prices.

Compound fertilisers are now quoted at around RM2,700 per tonne compared to a peak of RM3,400 months ago.

It added that while fertiliser cost pressure was easing, it was still expensive in light of the sharp plunge in CPO prices.

With planters cutting on fertiliser use to lower production cost, next year’s production could decline sharply, especially with tree stress setting in. This would support CPO prices.

OSK Research said crude oil prices have already fallen to the US$70 to US$80 per barrel area which was the deep water production cost level and could potentially be the bottom as producers start to lose money and reduce supply.

It also said sustainable palm oil certification had come into effect with planters starting to receive their certification for specific estates.

Those which have been certified include United Plantations, New Britain Palm Oil and Sime Darby.

Those that will receive certification before year-end include IOI Corp, KL Kepong, Kulim and PPB Group.

Certified palm oil is now commanding a premium of US$50 per tonne, which will help raise planters’ effective CPO price.

However, the biggest winner from palm oil certification is Kulim, whose certification will be group-wide, hence all of its palm oil will be certified.

“Neutral maintained but changing gear soon. We are maintaining our Neutral sector for now but believe the time to upgrade back to Overweight is around the corner,” it said.