El Nino to strike harder, but palm oil price not seen to soar

El Nino worries: A woman harvests coffee at a farm in Son La, northwest of Hanoi, Vietnam. With El-Nino back in a big way, Vietnamese coffee growers are staring nervously at dwindling reservoirs. – Reuters

THE strongest El Nino in decades is expected to mess up everything – people, birds, crops, fish – and for Malaysia, a major impact will be reduction in palm oil output which will drive prices higher.

However, this time round, crude palm oil (CPO) price may be on a mild uptrend as demand expectation may limit the upside, said Danny Wong, CEO, Areca Capital, adding that the previous round of El Nino had pushed the CPO price to as high as RM3,000 per tonne.

“Unless the CPO price goes above RM2,600 per tonne, winners will likely be limited to those that manage costs well as these are rising too especially labour costs,” said Wong who cautioned that if CPO price hit high, there could be a windfall tax in view of Federal budget constraints.

For more diversified exposure, Wong prefers Genting Plantations and Ta Ann.

Vincent Khoo, head of research, UOBKayhian, is positive of CPO price recovering further in 2016. In the event of a strong El Nino, the best beta plays are IOI Corp and IJM Plantations while Genting Plantations and Sarawak Oil Palms have the highest upside although based on the current CPO price of above RM2,300 per tonne, some have hit their target prices.

Meanwhile, another stock that could be positively impacted by El Nino could be QL Resources, said Khoo.

“Plantation stocks should rally closer to year-end as El Nino is still strong although the outlook for November is still uncertain,’’ said Chris Eng, head of research, Etiqa Insurance & Takaful.

El Nino is back and in a big way, said Bloomberg.

It has left Vietnamese coffee growers staring nervously at dwindling reservoirs; in Africa, cocoa farmers are blaming it for bad harvests and in the Americas, it has Argentines bracing for lower milk production.

Simply put, an El Nino pattern is a warming of the equatorial Pacific caused by a weakening of the trade winds that normally push sun-warmed waters to the west. This triggers a reaction from the atmosphere above.

The last time there was an El Nino of similar magnitude to the current one, the record-setting event of 1997-1998, floods, fires, droughts and other calamities killed at least 30,000 people and caused US$100bil in damage, said Bloomberg, quoting estimates from Kevin Trenberth, distinguished senior scientist at the National Center for Atmospheric Research in Boulder, Colorado.

Southern Sumatran and Javanese coffee and cocoa crops will probably be hurt, Drew Lerner, president of World Weather Inc in Overland Park, Kansas, was quoted as saying.

A drought in Kenya may cut tea production by 10%. However, El Nino-spurred rains may end up boosting next year’s harvest, Lerner said, adding that a lot of rain in Florida could exacerbate orange crop damage from citrus-greening disease.

Australia is expected to be hit too - in the 26 past El Nino events since 1900, 17 had resulted in widespread drought.

With the global economy facing cyclical headwinds, Singapore Prime Minister Lee Hsien Loong has warned that Singapore must brace itself to handle a possible downturn, said the Singapore Business Times (SBT).

At a dinner organised by the labour movement last week, he spoke of how the US - the world’s largest economy - was soft while Europe was in a stagnant state and China was experiencing a slowdown.

In Singapore, exports are flat and port operator PSA is handling fewer containers. GDP expanded just 1.4% year on year in the three months ended September, slowing from 2% growth in the June quarter, said SBT.

The Middle East’s oil export giants face a US$1 trillion crunch over the next five years if oil prices remain at their post-slump levels, the International Monetary Fund (IMF) has warned.

A vicious oil price rout since last summer has seen the revenue of oil exporting nations eroded away, wiping out a combined US$360bil in exports over the past year, said The Telegraph.

Iran’s oil minister Bijan Namdar Zanganeh had called on the Organisation of the Petroleum Exporting Countries (Opec) to drop production until the price of a barrel of Brent crude enters a range of US$70 to US$80 a barrel.

Thus far, the 12-strong Opec cartel has been willing not to give up on market share in response to sliding prices. The oil producing bloc has signed up to Saudi Arabia’s strategy, deciding to wait out the impact of booming US shale production, said The Telegraph.

Rafael Ramirez, Venezuela’s former oil minister, and now its UN ambassador, has also called on the cartel to drop output. Algeria is also understood to have lobbied Opec members for measures to prop up crude prices.

Calls to slash Opec production came as news broke that Saudi Arabia’s government has now delayed payments to its contractors for six months or more as the state seeks to defend its balance sheet, said The Telegraph.

Apart from the GST and exchange rate, Malaysians may have to pay more for their coffee, tea, chocolate, imported fruits and food for which production may be affected by El Nino.

Singapore has sounded the warning bell on economic slowdown; other countries in the region should be building up their resources to sustain the potential downturn.

It is a waiting game between the Middle East oil producers and US shale players in as far as oil price is concerned; it is a time for oil dependent countries to think of new strategies to wean them off this dependency.

When it comes to oil price, columnist Yap Leng Kuen is reminded of a line in a song – “the winner takes it all, the loser standing small.’’

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