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Monday January 22, 2007

Flood boon to CPO

FOREIGN brokerages expect the flood situation in Johor to give a short-term boost in the price of crude palm oil (CPO). 

CPO prices have already exceeded expectations over the past two months, and CPO currently trades at above RM1,900 per tonne. 

The spot price of CPO ended 2006 at its two-year high of RM2,000 per tonne, up 42% during the year.  

Increasing weather volatilities worldwide such as heavy rainfall in South-East Asia and drought in Australia will also lead world markets to raise the risk premium for agricultural commodities. 

CLSA is upgrading its average CPO price estimates to RM2,100 per tonne this year and RM2,200 for both 2008 and 2009. 

“We believe the edible oil prices including CPO will see a super spike probably in the second quarter of this year. In the run-up, earnings expectations will rise,” said research head Niklaus Olausson said in his recent notes on Malaysian plantations. 

CLSA is also upgrading the target price for IOI Corp Bhd to RM24 and Kuala Lumpur Kepong Bhd (KLK) to RM19.10 this year.  

The brokerage remains overweight on the plantation sector despite the strong run as “it is within a structural bull market.” 

Olausson said the near-term CPO supplies would likely tighten, especially with the expected strong export and the advent of the low production season. 

He also said the long-term structural elements of biodiesel remained intact.  

Credit Suisse research analyst Tan Ting Min in her notes maintained a bullish stance on the palm oil sector this year. 

She said the sector would see another good year, mainly driven by positive news flow relating to the new biodiesel capacities being built.  

Oil World estimated that 12 million tonnes of new biodiesel capacities would be completed by end 2008, which is a bullish indicator as the closing stock of vegetable oils worldwide is about 16 million tonnes. “We have a 2007 palm oil price forecast at RM1,725 per tonne, which is too conservative as the current palm oil spot prices are trading at above RM1,900,” Tan added. 

She is maintaining outperform calls on Kuala Lumpur Kepong, Golden Hope Plantations Bhd and Sime Darby Bhd. 

Last year, the US imports of palm oil from Malaysia showed the most spectacular growth of 19.4% year-on-year. The US is now Malaysia's third largest importer of palm oil, up from 10th position in 2002 and 2003. 

The US Food and Drug Administration's requirement to have trans-fat labelled on all food products from Jan 1 last year was the first kicker, followed by New York's ban on trans-fat with major food chains like Starbucks, Wendy's, Taco Bell and KFC jumping on the bandwagon. 

China, Malaysia's largest importer of palm oil, is also expected to strengthen its imports this year with the lifting of import quota on vegetable oils last year in line with World Trade Organisation guidelines.  

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