Plantations Weekly Review: 15th – 21st December 2008

· Decoupling from Crude Oil?
We have come to see in recent weeks that while crude oil has continued to plummet and closing in on the US$30 per barrel level, CPO prices have maintained quite steadily at the RM1500 per mt level. We believe this to be that prices are finally starting to be influenced by their own
fundamentals and that the biodiesel effect is beginning to lose its flavour given that only a very small percentage of palm oil is currently used for biodiesel production. Looking into stock prices over the week, most companies staged a mild recovery with IOI Corp leading the pack with an
11.3% gain. Besides that, Asiatic also gained 9.8% while KLK gained 7.1%. We believe that more recovery is due as there has been news from some companies we have recently spoken to that production has been on the decline in December as bad weather sets in.
· News and Views
India is again considering an import tax on palm oil as reported over the weekend. This comes in again as an effort to protect its national production of sun oil, and also that the country has sufficient CPO stocks bought last month. Impact will surely be a dampener for palm oil should it
be imposed. Good news at home though is that independent cargo surveyor, Intertek, reported that shipments of palm oil had risen some 39% in the first 15 days of December, on a MoM basis.
On fertilizer costs, the Government said that they may set a price ceiling for imported fertilizers given that prices have been sticky downwards. We believe there to be an eventual adjustment downwards in fertilizer costs as companies are holding back locking in their fertilizer needs until next year. Besides, there would not be much fertilization needed during the rainy seasons of December into 1Q09.
· Maintain Overweight.
We recently turned positive on the sector and hold the view that once production numbers start to come off and stock levels ease, there will be some recovery seen in CPO prices. Our average CPO price expectation for 2009 is at RM2175 and our top picks for the sector are IOI, Asiatic and
Sime Darby.

Oil World Excerpts

Oil World appears to echo our sentiments towards crude palm oil in that they expect that prices will rise in coming months to the US$660 (RM2277 CIF per MT @USD/MYR3.45) level. Oil World also said that palm oil prices appear to have reached the bottom of their downward price cycle since late July and are showing signs of a decoupling from crude oil. Besides that, it was also said that the recovery in edible oils should be led by palm oil, due to its steep discount to soy oil. Stock levels in Malaysia, particularly, are seen to be coming off from December onwards, and this along with the pick-up in usage of palm oil will aid some recovery in prices.
As for Indonesia, they say that Indonesian output is forecasted to see only slow growth at 28.0m mt in 2009 (19.3m mt in 2008). According to them, many Indonesian producers share the expectation that productivity will slow in coming months from the above average performance registered this year. Owing to reduced profit margins, many plantations may seize the opportunity to step up replanting but these are only expected to have a minor impact to plantings. Other than what was read there, we have also come to know that many smaller planters in Indonesia also face issues with credit and this may slow efforts of fertilization or expansion.

Market Movements

Over the past 3 weeks we have seen CPO prices stage a mild decoupling from crude oil prices and we find this to be a positive development indeed. We have always been of the view that CPO should not track crude oil prices given the profile of CPO as more of a food commodity. With regards to biodiesel, so far, <5% of CPO production is actually used for production of biodiesel hence the close relation, we believe, is not justified. CPO prices look to have bottomed out and we indeed hope for this to be the case. As for CPO and soy oil prices, we believe that due to the volume of production of CPO, it will act as a leading indicator and a recovery in prices could also induce some recovery in soy oil prices.

Looking into stock prices over the week, most companies staged a mild recovery with IOI Corp leading the pack with an 11.3% gain. Besides that, Asiatic also gained 9.8% while KLK gained 7.1%. We believe that more recovery is due as there has been news from some companies we have recently spoken to that production has been on the decline in December as bad weather sets in. To note, the recoveries has been despite that CPO weakened mildly during the week.