Huge global stock will continue to plague CP0

AS 2009 draws closer, it is clear that Malaysia’s golden crop is not expected to shine as brightly as it did in 2007 and the first half of 2008.

The bullishness in crude palm oil (CPO) prices and a healthy supply-and-demand chain seems to have fizzled out compared with last year’s gung-ho forecast that CPO could trade at an average of RM2,800 to RM3,000 per tonne in 2009.

Many industry players and plantation analysts had to revise their projections for 2009 further to between RM1,500 and RM1,600 per tonne from their earlier forecast of RM1,600 to RM1,900.

Within seven months, the CPO price nose-dived by 67% to about RM1,500 from its all-time high of RM4,486 in the first quarter of 2008, no thanks to the historic high in the national palm oil stocks which currently stand at 2.01 million tonnes.

The number one fear factor engulfing the CPO market is the ballooning world inventory level which is expected to rise to 9.6 million tonnes next year, from the 7.7 million tonnes at end-2008 and 5.9 million tonnes in 2007.

Malaysia and Indonesia are the world’s largest producers, accounting for about 85% of the global production.

CPO production in all major producing countries, particularly in fresh fruit bunches yield, remains robust and good crops are expected until early next year.

The physical demand growth slowed down when CPO prices reached record highs in March and April and the risk aversion had induced a drop in trade volume due to difficulties in obtaining letters of credit and buyers’ reluctance to maintain adequate stock levels.

There are also no festivities after January and February to encourage major buyers like China, India and Pakistan to stock up, thus any CPO price recovery would be minor and short-lived.

Buyers are also demanding price discounts as non-default premium, diminishing the impact of any recovery on most palm oil exporters.

It is said that the longer the inventory piles up, the more discount the CPO price will command due to increasing Free Fatty Acid content.

One consolation, however, is that physical demand would not entirely be at a standstill.

There is consensus that prices could recover by the first half of 2009 as local planters have recently put on hold or lowered their fertiliser applications, and this may result in lower yields by the third quarter.

Efforts are also being made by Malaysia and Indonesia to cut palm oil production by encouraging replanting activities and the implementation of mandatory biofuel initiatives next year.

Despite all these efforts, one cannot be in denial of the alarmingly huge global palm oil inventory that will continue to plague the CPO market in 2009.

One has to be realistic that the windfall profits of early 2008 are effectively history. A word of caution to investors and plantation companies – there could be an erosion in profit margins in the next three quarters.

Hanim Adnan is assistant news editor at The Star. She believes that come what may, palm oil will remain as one of the world’s largest traded edible oils with huge following