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Crude Palm Oil: The Liquid Gold You Should Know About
Perspective | 07 October 2011
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By: Louis Kent Lee
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By: Jade Lee
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If you talk about commodities, it’s not uncommon if you immediately hear someone shouting “Crude Oil”, “Silver”, “Gold” or even “Coffee”. Not many will actually pay attention to the millions of squat green trees, spanning across hectares under the tropical weather, as compared to the popular commodities that I’ve mentioned earlier on. I mean, why should they?

Unknown to many, the extracts from the millions of squat green trees I’ve been talking about do hold sparkling prospects, in fact, this liquid gold called Crude Palm Oil (CPO) has been quietly making waves around the commodities market. The climb in CPO prices seen from the chart below took many by surprise as CPO started its move from the US$700/t region to a whopping US$1,298.50/t high seen in February 2011.

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Although seasonal factors come into play for the CPO (price fluctuations pertaining to seasons), the sudden surge of buying interest still baffles many. One of the most important reason why CPO has gotten the attention of many and a demand boost is because the prices of fuel, especially when it traded past the US$100/barrel level, is making people source for alternative sources of energy. Besides its traditional use for cooking and whatnot, CPO is now being processed and channelled for other uses. The Malaysian government is now refocusing the traditional use of CPO to the production of biodiesel, to cater to the huge demand from European countries.

Other than Europe, strong demand in biodiesel is also expected to be seen in countries like Columbia, India, South Korea and Turkey, which will fuel the industry’s growth as more and more countries try to reduce their reliance on fossil fuels. This will essentially translate to inevitable growth for this commodity as demand grows, which, with everything held constant, fuel the rise of CPO prices. We have narrowed down two commodities companies with business segments that form heavy dependence on CPO (refer to insert article below).

Commodity Stocks For Thought

Golden Agri-Resources

Positive Sentiment From Greenpeace – Nestle S.A. has earlier resumed buying palm oil products from Golden Agri-Resources (GAR)’s Indonesian unit, prompting analysts to view it as positive news in improving sustainability of its CPO plantations and strong endorsement of its “green” progress. Recall in Mar-11, GAR was reported breaching environmental regulations which prompted Unilever, Nestle and Kraft Foods to suspend purchases of its palm oil products.

That being said, we expect further catalysts from the resumption of CPO purchases by other food giants such as Unilever. Notably, Unilever contributed a total of 3% of GAR’s FY08 sales while Nestle contributed only a marginal 0.5% of GAR’s FY09 sales; said CIMB and OCBC. Both houses recommended “Buy” with target price of $0.81 and $0.80 respectively thereafter.

Expansion remains in focus. Touted as the world’s second largest palm oil plantation, GAR has planted a total area of 446,200 hectares as at 30 Jun-11, located in Indonesia. And the firm is not stopping there. It aims to expand its plantations by 20-30k ha per year in the next three years, mainly by cultivating its existing 100k ha land bank in Indonesia.

GAR expects a higher CPO output this year. Earlier, GAR guided that it should be able to achieve a 5-10% increase in CPO production this year if weather conditions remain favourable. As a recap, GAR’s 1H11 CPO productions was recorded at 1.25 million tonnes, a 31% increase compared to the same period last year.

Size aside, the reduction of Indonesia’s tax on refined products from mid Sep-11 also caught our attention. Remarkably, the export tax on refined, bleached and deodorised palm oil has been cut to 10%, while top rate for palm oil remains virtually unchanged at 22.5%. This further translates into an immediate price advantage of between $72 and $129 a ton, according to Palm Oil Refiners Association of Malaysia.

The resilient CPO prices continue to grab our attention. Particularly, Daiwa expects CPO prices to rise to US$1,150/ton by end-2011 and peak at US$1,400/ton by end-1H12. The house recommended “Outperform” with target price of $0.86, adding that declining inventories, tight soybean market as well as rising vegetable oil will continue to support growth momentum.

Mewah International

Small Yet Attractive – Mewah International (Mewah), a smaller scale oil palm firm with refineries in Malaysia, could be another choice for those who want to diversify their portfolio of palm oil stocks.

Interestingly, Mewah takes up a total of 45-55% of total branded cooking oil in Nigeria-Togo-Benin. As cooking oil is being viewed as a basic necessity, the possibility to see a sharp drop in demand is not likely, in fact demand could even be sustained and strengthened. In addition, the absence of imposition of price caps in Africa also enables the firm to be able to pass on the raw material prices to customers through a higher average selling prices.

Besides, Mewah’s high capacity utilisation appears pretty attractive to us. According to Nomura, Mewah has a current capacity utilisation of ~92-94% (Indonesian average: ~65-75%, Malaysian average: ~80-85%), which provides the firm with an advantage of economies. To top it off, Mewah aims to increase its refining capacity by 19% to 3.3m tonnes per annum by 2H12.

However, the changes to Indonesia’s palm oil export tax rules may result in stiffer competition for Malaysian refiners such as Mewah due to the absence of palm oil export tax discounts. Nonetheless, DBS Vickers Securities believe that the recent sell-down on Mewah should have already priced-in potential weakness from changes in the Indonesian export tax rates.

Additionally, the house expects Mewah to report a better performance following a disappointing 2Q11 results. Underpinned by higher volumes and margins due to seasonal uplift in demand from the Eid festival, the house expects to see sales of around US$12.5-15m (+108-250% q-o-q), and upgrading Mewah to “Fully Valued” from “Sell” with target price of $0.39.

Alternative energy aside, palm oil is also used for another one of the most essential things in the world. Besides being able to be processed into biodiesel, CPO can also be processed as an edible vegetable oil, which makes it one of the most consumed vegetable oil in the world.

Kenanga plantation analyst Lim Seong Chun expects palm oil yields and production to peak in October and November. “The current stronger palm oil price is due to the short supply of soybean oil and flaxseed oil. People tend to buy palm oil when there is a shortage of soybean oil”.

Interestingly, palm oil’s wide price discount to soybean oil as of current may boost export demand which could push CPO prices up in the next few months.

This is a co-written article of Shares Investment, which lays out the analytical ideas and thoughts of the authors, who are well versed in investments and market concepts.

Golden Agri-Resources  0.285 -- --   
Business: Co is engaged in cultivating & harvesting oil palm trees, processing fresh fruit bunches (FFB) into crude palm oil (CPO) & palm kernel (PK), & refining CPO into industrial & consumer pdts.

Insight: May-19, 1Q19 revenue fell 11% due to softer crude ... Read More
Mewah Int'l  -- -- --   
Business: Co produces and sells refined and fractionated vegetable oils and fats. [FY18 Turnover] Bulk division (68.9%), consumer pack division (31.1%).

Insight: May-19, 1Q19 revenue slid 13.4% despite higher sal... Read More

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The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

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