Floods keep CPO prices buoyant

KUALA LUMPUR: Palm oil prices continue to stay bouyant as the latest data from the industry regulator showed fruit harvesting activities came to a standstill in areas inundated by the floods.

The Malaysian Palm Oil Board (MPOB) noted crude palm oil (CPO) output in Kelantan, Terengganu and Pahang fell 28 per cent in December 2014 to 201,736 tonnes from a year earlier.

Supply cuts has fuelled bullish sentiment in palm oil prices. CPO futures on the Malaysian Derivatives Exchange yesterday continued its uptrend in the fifth week, closing at RM2,353 a tonne.

Analysts anticpate CPO prices to go beyond RM2,400 per tonne in the next few weeks as the production in the east coast of the Peninsula is expected to contine being affected by the floods.

For the past six weeks, the heavier-than-usual monsoon flood in the east coast of Peninsula Malaysia had killed 28 people and displaced more than 200,000. It had also damaged many houses, roads and bridges.

RHB Research maintained a neutral outlook on the plantation sector as it cited heavy flooding is the main culprit of the sharp production decline in December 2014.

"Inventory level will likely continue to fall in the next four months as the seasonal downcycle progresses. Although near-term upside for palm oil price appears to be on the cards, we assume prices to average at RM2,500 per tonne," it told investors yesterday.

MIDF Research highlighted the higher-than-normal rainfall towards the end of 2014 over Peninsular Malaysia in particular, has had adverse effects on the oil extraction rate (OER). In December, the OER in Peninsular Malaysia dropped 20.14 per cent from 20.46 per cent. 

As heavy rainfalls are expected to continue in January 2015, the research house does not expect this month's CPO production to recover significantly.

It also said the weakening Ringgit over the US Dollar will also help to stimulate demand and firm up CPO prices. MIDF reiterated its neutral stance on the sector and forecast CPO price to average at RM2,650 per tonne.

PublicInvest Research noted that in December 2014, stock-to-usage ratio slid from 10.9 per cent to 9.8 per cent as CPO production tumbled, while exports improved slightly.

It said December 2014 palm oil exports was 0.4 per cent more than in November as weaker demand from China was cushioned by stronger exports to EU, India, Pakistan and the US.

Stocks-to-usage ratio reflects the excess of supply against demand. It is calculated by dividing the ending stocks by the demand. A fall in stock-to-use ratio means higher chances of price rise in the weeks ahead.

The research house said damaged roads and bridges, which have hampered transportation and harvesting activities, will take a few months to be repaired. 

"CPO output in the east coast would continue to be affected in the coming months. As such, we expect CPO prices to slowly tip over RM2,400 per tonne in the next couple of week."

HLIB Research believes this month's stockpile will fall further on seasonal output downtrend. Like other research houses, HLIB maintained a neutral call on the oil palm sector.