Plantations Monthly Review: December 2008

January 7, 2009 at 7:01 am Leave a comment

· Coming round the mountain.
CPO prices closed at a convincing RM1,740 as of 2Nd Jan up 6.1% from the end of November. Much to our delight there has been a rather convincing decoupling between crude oil prices and CPO prices as crude oil prices continue to be eroded by declining demand while CPO prices are staying true to its fundamentals and finding a clear bottom. However, over the past week and into Jan 2009, prices appear to be on the same path again but we do not believe to be speculation driven. Also, further bolstering our argument that CPO prices can and will improve is the current high level of aggregate open interest contracts on CPO futures trading. As the contracts are closed out, CPO prices should find a higher level to trade at as seen in the mid 2007 period.
· Upgraded to Overweight
Early December, we upgraded to sector from Neutral to Overweight (refer to report entitled “It is Darkest before Dawn” issued 8th Dec) and cited our 2009 CPO price average expectation at RM2175. Our expectation is that when production numbers start to come off as per seasonal factors, pressure on CPO prices will ease as stock levels loosen. Also, we believe that the RM1500 levels looks like a base for prices and should recover in 2H09 especially when export numbers start to make a comeback. In the meanwhile however, things could remain choppy but buying opportunities are aplenty for big caps and efficient planters like IOI and Asiatic.
· Yields starting to slow
November’s MPOB stats showed a promising slow in production numbers and crop yields while exports showed a lukewarm recovery. This however was not sufficient to stem the increase in stock levels. It waits to be seen if December production numbers will show negative production growth as some planters have reported that they are seeing yields start to come off as the rainy seasons set in.
· Maintain Overweight.

News and Views

MPOB November Stats – Slow progress
November’s MPOB stats showed a promising slow in production numbers while exports showed a lukewarm recovery. This however was not sufficient to stem the increase in stock levels. It waits to be seen if December production numbers will show a decline as some planters have reported that they are seeing yields start to come off as the rainy seasons set in.

December exports reported to be strong

Malaysia’s palm oil exports rose 25% in December from the previous month, according to
independent cargo surveyor Intertek. A total of 1.65m mt of CPO were tracked in December.

Fertilizer price continue to come off, effects seen soon

Fertilizer prices continue to make progress of coming off during the month but for potash as seen in the figure below. We believe that despite price sticky-ness downwards, domestic prices will eventually weaken. This is also because most companies will not be doing much fertilizer application during wet months and will also hold back purchases to wait for prices to weaken. Along with government efforts, we see that companies could be able to guard their margins during 2009 or some might even see improvements if fertilizer prices adjust to market rates.

Market Movements

Much to our delight there has been a rather convincing decoupling between crude oil prices and CPO prices as crude oil prices continue to be eroded by declining demand while CPO prices are staying true to its fundamentals and finding a clear bottom. However, over the past week and into Jan 2009, prices appear to be on the same path again but we do not believe to be speculation driven.
Also, further bolstering our argument that CPO prices can and will improve is the current high level of aggregate open interest contracts on CPO futures trading. As the contracts are closed out, CPO prices should find a higher level to trade at as seen in the mid 2007 period. Share prices staged a healthy recovery over the month but for Sime Darby given the issue of the purchase of IJN. Stealing the show would be IOI Corp which has even come up to our target price of RM3.90. Asiatic and KLK also performed well during the month like on bargain hunting activities and general improvements seen in CPO prices. In fact as of 2nd Jan, CPO prices had briefly crossed the RM1700 level. We hold our views and target prices for the moment as we expect trading to be choppy in coming months.

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