SEVERAL commodities such as crude palm oil (CPO) and steel have seen a good run this year after having been in the doldrums in 2015. But can the run be sustained?
CPO has risen more than 22% on a year-to-date basis, while steel prices have gone up by almost 56% since the beginning of the year.
For CPO, the price is likely to edge higher in the coming months supported by lower production as well as the weak ringgit, says CIMB Research regional head of plantations research Ivy Ng.
“The CPO price is expected to remain firm until the first quarter of next year and extend up to the second quarter. In December, CPO is targeted to trade between RM2,800 and RM3,200 a tonne,” she tells StarBizWeek.
She adds that the first quarter is the seasonally lower production cycle for oil palm before higher production in the second half of the year.
Note that veteran industry analyst Dorab Mistry said last month that CPO prices may climb to RM3,300 in the first quarter and may surpass even that on a weak ringgit.
“In the second half of 2017, we reckon that the CPO price will slide on higher production and recovery from the El Nino phenomenon,” says Ivy.
The El Nino weather phenomenon has seen dry weather in Malaysia, stunting palm oil production. The palm oil output in Malaysia fell more than expected in November and is expected to decline further in the coming months.
For this year, the production of CPO has declined by 1%-3% compared to a year ago.
Ivy says other external factors such as stronger crude oil prices and the weak ringgit would help to stabilise CPO prices next year.
“Higher crude oil prices would sustain Indonesia’s biodiesel policy, which in turn would support the demand for CPO,” she says.
On the steel price, RHB Research analyst Ng Sem Guan expects it to remain stable next year with limited upside.
“The global steel price has gone up from distress levels in late-2015 to early-2016. It is expected to trade at a healthy level, but with not much of upside as long as excess capacity in China lingers in the market,” Sem Guan says.
China is the world’s largest producer and consumer of steel, making up 50% of global demand.
The China Government had earlier indicated its commitment to reduce the steel production capacity via the consolidation of steel groups and provide financial support of 100 billion yuan for worker retrenchment schemes.
For years, aggressive dumping of imported steel products, mostly from China, has rendered many local steel millers uncompetitive with widening losses and their operations almost at a standstill.
But recent months, with a recovery in global steel prices and the Malaysian Government’s latest safeguard measures on imported steel starting Sept 26, have seen life in the local steel players.
Domestic steel prices have gone up by over 10% year-on-year, with steel bars trading at RM1,800-RM1,900 per tonne and wire rods at about RM1,900 per tonne.
The improvement in steel prices has also reflected in the trading of most steel companies listed on Bursa Malaysia, which saw some of them becoming some of the best-performing stocks for this year. Mycron Steel Bhd, Ann Joo Resources Bhd and Leader Steel Holdings Bhd are among the best-performing stocks this year, rising more than 100% year-to-date.
Nonetheless, Sem Guan notes that excess capacity of steel in China would take years to resolve and that it is unlikely to see sharp increases in the global steel price in 2017.
“Basically, the safeguard measures by the Malaysian government for steel products will continue to help local steel players in terms of profitability. But we still have to wait until April 2017 for the final determination,” he says.
Note that the provisional safeguard measures on steel wire rods and steel bars among others are “preliminary”, lasting for 200 days.
The final determination will be made in April next year, which means once the determination is set, the safeguard measures could last for the next four to six years.
Sem Guan expects demand for steel in Malaysia to maintain at 10 million tonnes next year, with limited upside for higher demand due to the softer property market outlook.
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