IOI betting that there will be recovery in palm oil prices

Top palm oil producer IOI Corp Bhd is betting that crude palm oil (CPO) prices will recover later this year, according to AmResearch.

“Due to IOI Corp’s favourable view on CPO prices, the group is currently selling at spot prices. Channel checks with a few other plantation companies indicate a similar trend,’’ analyst Gan Huey Ling said in an update on the company yesterday.

The benchmark CPO futures contract on Bursa Derivatives had dived 27% from a recent peak of RM2,789 a tonne two months ago. The steep drop was due to a recovery in production and stockpile in the country, OSK Research said in a report dated July 13.

Yesterday, CPO price jumped RM46 to close at RM2,036 a tonne as the vegetable oil tracked a rebound overnight in the US soyoil market.


Despite the recent price decline, CPO futures contract was up 22% year-to-date. “IOI Corp reckons that the recent fall in CPO prices is an overreaction and that palm oil production in Malaysia would peak in August or September,’’ Gan said.

The Malaysian Palm Oil Board’s monthly statistics for June showed total CPO output rose 3.6% month-on-month to 1.44 million tonnes, just shy of the 1.47 million tonnes reported in the same month last year.

IOI Corp’s CPO output rose as much as 6% in June from 57,400 tonnes in May, according to Gan. The numbers achieved in June, however, were still lower than the same month last year.


CIMB Research, in a note dated July 13, kept its “neutral” stance on Malaysian planters, as concerns over CPO price correction in the third quarter was offset by potential supply risks stemming from the El Nino, an unusual dry-weather system that happens every few years.

The El Nino has a worldwide impact and, in the previous occurrences, had resulted in price spikes in the CPO market as production from plantations in Malaysia and Indonesia fell.

“As the El Nino is still at an early stage, it is too early to assess its potential pattern,’’ CIMB said.

The erratic nature of the El Nino, coupled with hazy outlook for edible oils’ supply and demand worldwide, means the market is split on the direction of the CPO market.

Inter-Pacific Research yesterday predicted that local palm oil production this year would improve 2.3% from last year to 18.2 million tonnes. The firm expects weaker prices in the second half of the year for CPO, after it averaged at RM2,237 per tonne during the first half.


An industry observer noted that planters would normally refrain from locking prices for their future palm oil production when current prices were deemed too low and might rebound in the coming months.
Likewise, they will try to lock in prices for as much as their forward output if they see prices nearing their peak levels.

AmResearch estimated that IOI Corp’s current plantation operating cost was less than RM1,200 per tonne.