Monday October 8, 2012
Weak CPO prices cripple Bursaís winning streak, makes Govt revisit export tax policy
Corporate Portrait by Sharidan M. Ali
AS the world's second largest producer of crude palm oil (CPO), any changes in policy or prices of the commodity will definitely ruffle the Malaysian market.
Last week, two major events took place that had negative and positive influences on the sector as well as the local stock exchange.
Plantation companies, which generally enjoy good cashflows that hinges on high CPO price, experienced a knee-jerk reaction when the commodity futures on Bursa Malaysia plunged below the RM2,300 mark on Tuesday, which saw the three-month benchmark December contract fell 8.4% to close at RM2,255 per tonne, its biggest single-day drop since July 2008, mainly due to supply and demand mismatch.
HwangDBS Vickers Research has revised downward its future CPO price estimates for 2012, 2013 and 2014 by 8%, 9%, 8% to RM3,020, RM2,940 and RM2,830 per tonne respectively on higher inventories.
“The recent drop is excessive. We believe CPO should fundamentally revert to RM2,800 in the fourth quarter this year.
“Plantation stocks have stayed relatively more resilient. But at 14.1 times forward price-to-earnings ratio, the sector is now close to fair value.
“We recommend to exit when CPO and plantation counters recover,” it said.
JP Morgan Malaysia said besides the usual reasons for the CPO price weakness, which included high stock levels, high output season and weak biodiesel demand, other factors leading to this situation were weaker crude oil prices and better weather conditions in Brazil that would improve soybean supply from second quarter 2013.
It said CPO discount to soy oil was now at US$310 per tonne versus a historical mean of US$160 per tonne.
As of August 2012, Malaysia's CPO inventory level shot up by 6% on a month-on-month basis to 2.11 millions tonnes.
This development has sent a sense of fear that the commodity price, which had been averaging about RM3,230 per tonne from December 2010 to August this year, was heading south.
Bursa Malaysia's winning streak was crippled on Wednesday, weighed down mainly by plantation counters affected by weak CPO prices.
At the close on Oct 3, the FTSE Bursa Malaysia KL Composite Index was down 0.11% to 1,649 points after touching an intra-day low of 1,640.
Among the biggest losers on that day were plantation stocks like Sime Darby Bhd, Genting Plantations Bhd and Kuala Lumpur Kepong Bhd which put up a knee-jerk reaction after CPO futures on Bursa Malaysia plunged some 8% to close at RM2,255 per tonne.
MIDF Research, which has maintained a “neutral” call on the sector, said that over the past month, CPO prices had slumped from the RM3,000-per tonne-level to RM2,252 currently.
“Consequently, the decline in CPO price had dragged Kuala Lumpur Plantation Index (KLPLN) to 8,080 points, a one-year low.
“We believe the downward trending in CPO price was mainly attributable to expectation of weaker demand from China and Europe due to the uncertainty in their economy. Consequently, it results in mounting concerns over the hitherto rising inventory level,” it said in a report.
In reaction to this, the Plantation Industries and Commodities Ministry has proposed to restructure the palm oil tax rate to help strengthen exports and reduce the inventory level.
The move was possibly due to the fact that Indonesia, which is the number one CPO producer, had decided to cut further its CPO export duty from 20% to 16% in the final quarter of 2011.
It was reported that the Malaysian CPO export tax policy, which is unchanged since the 1970s, would likely see a downward revision to between 8% and 10% from the current 23%.
The ministry was also considering accelerating further the export of duty-free CPO.
BIMB Securities Research said this measure, if approved, was expected to provide some upward pressure on the near-term CPO price, which should then benefit upstream planters.
“In contrary, refiners are at the disadvantage side which would suffer from higher input cost. However, the negative impact will be negligible, given the recent low CPO-price environment,” it said
To further neutralise the negative impact to the refiners, BIMB Securities believed that the Government should abolished the duty-free CPO export quota that benefited only a few big plantation companies with refineries abroad.
“Nonetheless, we do not expect an immediate cut on the duty-free quota but this could be done in stages,” it said.
As of Friday, three-month CPO price gained RM30 to RM2,382 per tonne.