CPO price outlook for 2009

CPO price outlook for 2009
Expect lower CPO price volatility in 2009. We expect CPO price to show less volatility in 2009 and we predict a price range of RM1,200-2,400 per tonne. The higher end of the trading price range assumes supply shortfalls due to unfavourable weather conditions while the lower end of the price estimates assumes that CPO price gets some support near its cost of production should global edible oil stocks remain ample and there is further unwinding of funds out of the commodity markets if the financial crisis deepens. The breakeven palm biodiesel price range based on our predicted CPO price range is US$49-94 per barrel, assuming no subsidies. To recap, CPO price hit a peak of RM4,300 per tonne and a low of RM1,400 per tonne in 2008. From peak to trough, the price difference was a staggering RM2,900 per tonne in 2008.

Rationale behind CPO price trading range forecast. Taking into account lower palm oil tax and the declining crude oil and fertiliser prices, we estimate that the breakeven average cost of production for CPO is around RM1,200 per tonne and have set the lower end of our CPO price band at that level. We believe this level could be reached if weather conditions are ideal and demand is weaker than expected due to deteriorating global economic conditions and a low crude oil price environment. We have used RM2,400 per tonne as the upper end of the trading range for CPO price as we believe this level will be sufficient to entice planters to resume planting and fertiliser input, which will help boost supplies. We think that this selling price will lead to a positive supply response in the current economic conditions. This is because farmers will be making a hefty profit margin of around 100% at RM2,400 per tonne.

We are also of the view that at this price level, biodiesel will not be economically
viable based on our crude oil price assumption of US$60 per barrel and the
Indonesian and Malaysian governments may scale back their biofuel plans which are intended to support CPO price. Also, the replanting incentives may not attract good take-up rates. Lastly, we feel that the high price may lead to demand destruction for CPO amid the global economic slowdown.

Average CPO price projected to decline 42% in 2009 before recovering in 2010.
There is no change to our CPO price assumptions of RM1,600 per tonne (US$435) for 2009 and RM1,900 per tonne (US$530) for 2010. Our price forecast for 2009 represents a 40% decline from the RM2,773 per tonne achieved in 2008 and is underpinned by slower growth in demand for edible oils, declining crude oil price and less speculation by funds in the commodity market. For 2010, we expect CPO price to increase by 19% to RM1,900 per tonne as measures put in place by the governments of Malaysia and Indonesia in the previous year will start impacting palm oil supply and boost demand in a more meaningful way. Our CPO price forecasts assume normal weather patterns in major planting areas.

Long-term average CPO price of RM2,000. We carried out a rough analysis of the likely long-term level for CPO price by comparing the RM1,310 per tonne average for 1991-2005 before the emergence of biodiesel against the average cost of production of RM700 per tonne. The gross profit margin for the 15-year period worked out to be around 47% or RM610 per tonne. Applying the same profit margin of 47% to the new cost of RM1,200 per tonne, we get a new long-term average of RM2,264 (US$629) per tonne. Applying the same absolute gross profit margin, the long-term average would be RM1,810 (US$502) per tonne. We work with profit margins as we believe this will be the key to enticing farmers to invest long term in the palm oil sector to cater for future global consumption. We cross-check this with the breakeven price for biodiesel without subsidy at our long-term crude oil price of US$90/barrel. This alternative methodology gives us a price of RM2,100 per tonne. Taking the average of the potential long-term average CPO price based on the above methodologies, we arrived at a long-term average price of around RM2,000 (US$555) per tonne (fob basis).