Tuesday, March 15, 2011

Plantation Sector

by Batavia Prosperindo

· Lower production to obstruct supply
According to Malaysian Palm Oil Board (MPOB), the CPO production in Malaysia reached 16.9 mn tonnes which was declined by 3.3% y-o-y. The unusual weather throughout 2010 was deemed to be the major reason behind the lower production in Indonesia and Malaysia. As both countries represented around 86% of the global CPO production, thus the reduction will affect the global palm oil supply. We view shortage in 2010 will remain an overhang in 2011 thus triggered another price acceleration.

· Rising demand

The demand for palm oil is primarily for food as it was used as an ingredient for many food products and serves as a source of energy for its fat contained. According to USDA estimate, total domestic consumption in 2010 is expected to reach 46 mn MT which is increased by 6% y-o-y. Rising population coupled with higher income per capita from recovering global economy will be the main driver for consumption growth to persist in the future, not to mention the increasing use for bio-diesel and cosmetics.

· Higher CPO price assumption

In fourth quarter 2010, all of plantation companies were benefiting the highflying CPO price as it accelerated by 27% q-o-q. The CPO price even reached to 33-months high at $1,312.5 in early Jan 2011 and is now comfortably at above $1,200 level. Short term catalyst for another price hike are inflation fears and higher crude oil price but there is a possibility of correction in 2H11 from better crop harvest. Nevertheless, we think fundamental remains solid in the long run on the back of increasing demand. As a result, we raised our average CPO price assumption to $1,000 per MT for 2011 onward from the previous $900.

· Risk to our view

Several risks to our view are a favorable weather condition resulting in a abundant crops from Palm and Soybean, product substitution due to high CPO price, lower crude oil price, and black-campaign on CPO.

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