CPO price may have hit bottom amid disappointing production
but prices could languish a little longer as speculative forces weigh on
prices. The weatherman has now warned of
a potential return of the drought-inducing El Nino weather phenomenon
in the winter. We consider an El Nino
occurrence, which has a tendency to curb
palm oil yield and drive up prices, highly probable following back-to-back episodes of La
Nina in
the past 2 years. This will serve
as the catalyst for a palm oil price
rally. Maintain Neutral on sector, with selective buying of quality growth
stocks.
CPO price carving out
a bottom. We believe palm oil price
has declined to levels where it has bottomed
out. With production starting to struggle and inventory on the decline, CPO
price should be very close to a bottom. China loses some momentum. China’s
vegetable oil imports for the first 4 months of the year jumped
by a very commendable 29.1%, but this
represented a slowdown in momentum
as imports surged by some 38.9% in the first 3 months. On the other hand, India’s
buying momentum picked up from +35.3% y-o-y in the first 3 months of 2012 to +48.5%
for the first 4 months of the year.
Speculation weighs on
CPO price. It is likely that the
recent sharp decline in CPO price was due to weakness in the prices of other
commodities. Soybean oil’s speculative position has swung from a net long to a
net short while soybean has seen some long liquidation from its record-high
speculative net long position. Nevertheless, the speculative long for soybean
is still high and there is still room to decline.
Hitting bottom.
With the
fundamentals supportive of higher prices but countered by speculative
forces, we believe CPO price is in the
early stage of base building, which may take time. We continue to like
growth stocks such as First Resources and Sarawak Oil Palm. We also like BW
Plantations after its recent price
correction, as well as Kencana Agri, which is likely to have turned the corner.
Source: OSK
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