THE issue of rising palm oil stocks, resulting in the current downward spiral in crude palm oil (CPO) prices, must not be “overplayed”, as the commodity is fundamentally supported by encouraging global supply and demand factors.
That is the view of Malaysian Palm Oil Association (MPOA) chief executive M.R. Chandran, who said: “I do not consider the current stockpile of 1.5 million tonnes high as Malaysia’s average palm oil monthly exports are between 1.1 and 1.3 million tonnes.”
“If one were to compare this export figure of 1.3 million tonnes with the current stocks of 1.5 million tonnes, the stockpile is not excessive at all,” he told StarBiz in an interview.
The palm oil stock has been on the rise lately, exceeding the psychological figure of one million tonnes to hit about 1.5 million in December last year – the highest level since the 1.495 million tonnes recorded in February 2001.
Chandran pointed out that the local market always based the CPO pricing on the psychological figure of one million tonnes in stocks.
“Once the palm oil stock exceeds the psychological figure, many industry players tend to panic and will try to sell (the commodity) at reduced price levels,” he said.
Some analysts maintained that although the local palm oil stockpile had risen, it only covered 1.3 months of exports, which was a 10-year average. By the same token, the world stock to usage ratio of palm oil this year is expected to fall to 14.4% from 14.5% (reduced to 300,000 tonnes from 500,000), indicating tightness in world palm oil supplies.
“Local players must change their mindset and try to look in the context of global palm oil production,” he said.
The world’s average production of palm oil is about 2.5 million tonnes per month. “On a global basis, Malaysia is actually keeping just one-month stock and not holding four or five-month stockpile,” added Chandran.
Malaysia’s palm oil production is estimated at 14 million tonnes last year while analysts forecast Indonesia’s production at about 12.2 million tonnes.
According to Chandran, MPOA expects CPO spot price to climb back to reasonable levels at about RM1,400 per tonne by April or May compared with the current price level of about RM1,285 per tonne, which is due to the seasonally weak demand from major importing countries like China, India and Europe in the first three months of the year.
“We want to see competitive prices of between RM1,350 and RM1,450 per tonne this year based on planters' cost of production structure. Anything above the RM1,450 level will be a windfall for plantation companies,” he said.
On the supply factor, he said the current tight world edible oil supplies would be able to lend support to edible oil prices, including palm oil.
“I believe the future of palm oil in terms of demand looks bright, especially with the trans-fatty acids (TFAs) issues which will help drive up US consumption for palm oil and with the anti-genetically modified organisms (GMO) food stance in the European Union,” Chandran said.
About 90% of soybeans from South America and more than 50% from the US were GMO crops, unlike palm oil which was GMO-free, industry observers said.
Realising the impact of CPO prices on the plantation industry, the Plantation Industries and Commodities Ministry last month set up a “palm oil price monitoring committee”, chaired by Deputy Minister Datuk Anifah Aman, to look into the short- and long-term strategies for the commodity.
On the palm oil stock management, Chandran said: “In the short term, we will be looking at a mechanism to blend palm olein with diesel to reduce stock levels.
“The long-term plan is to set up a bio-diesel plant with a production capacity of 500,000 tonnes per year.”
Other important issues to be addressed include the different import tariffs imposed by India on palm oil versus soyoil.
“India imposed a 45% import tariff on soyoil compared with 65% on palm oil. This puts soyoil at a price advantage of more than US$120 per tonne over palm oil, thus creating the perception that palm oil is inferior to soyoil,” he explains.
He added that the difference in import tariffs had resulted in palm oil not being able to realise its intrinsic values or techno-economic properties.
Malaysian Palm Oil Promotion Council chief executive Datuk Haron Siraj said: “In a high palm oil stock scenario, we must seriously consider newer markets and new potential uses of palm oil such as in the biofuel industry which holds promising opportunities.”
He said Malaysia had received a lot of enquiries on the potential purchase of palm oil, especially from European countries that promoted environmental conservation and were currently reducing their consumption of fossil fuels.
“The penetration into newer markets will also buffer against any potential decline (in demand from) major traditional palm oil importers,” he added.
Analysts pointed out that the activation of credit facilities granted to Russia under the Palm Oil Credit Payment Arrangement would result in the country purchasing 500,000 tonnes instead of its annual average of 130,000 tonnes.
Meanwhile, Mayban Securities in its latest sector outlook for 2005 maintained its “overweight” stance on the sector, given the strong fundamentals surrounding the palm oil demand and not solely premised on the expectation of higher CPO prices going forward.
“The increase in plantation acreage and production coupled with milling efficiencies are expected to drive earnings for plantation companies. At current (CPO price) levels, plantation companies would still enjoy healthy margins, given the average cost of production between RM600 and RM700 per tonne,” the research unit said.
It added that the strong cash flow generated would be able to sustain attractive dividend payouts.
Diversification into downstream ventures among some plantation companies will also serve to cushion the effects of the excessive fluctuation in CPO prices.
Mayban Securities has recommended a “buy” on PPB Oil Palms Bhd and KL Kepong Bhd and a “trading buy” on Golden Hope Plantations Bhd, but placed “hold” calls on IOI Corp and Kumpulan Guthrie Bhd.