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Wednesday, September 17, 2014

‘Plantation stocks are good buy’


PALM oil’s slump to a five-year low offers investors an opportunity to buy plantation stocks, according to Dorab Mistry, director at Godrej International Ltd, who says producers are still making money.

“I am often asked these days if palm plantation and processing company equities should be bought: my answer is a resounding yes,” Mistry said on Monday, without identifying the stocks.

“You invest in plantations when palm oil prices are low. I prefer processing companies which manufacture speciality fats, oleochemicals, biodiesel and own consumer brands. Upstream companies will benefit when the price cycle turns.”

Mistry, who has traded palm oil for more than three decades, joins Standard Chartered Plc in recommending investors buy plantation stocks to profit from a rebound in prices.

Palm oil fell to a five-year low on September 2 as output from Indonesia and Malaysia, the biggest producers, topped demand amid a glut in global cooking oil supplies, including soyabean oil.

Global palm consumption increased 81 per cent in the decade to last year as rising incomes lifted demand, United States government data show.

“Long-term demand for palm oil is very supportive of the sector, and that supports the case for recovery in crude palm oil (CPO) prices,” said Alex Fergusson, a fund manager at Singapore-based Woodside Holdings Investment Management Pte, referring to a period of five to 10 years.

Growth in per capita gross domestic product and populations in emerging markets are the drivers for demand, said Fergusson.

Prices will drop in the next few weeks towards the cost at which growers in Asia produce the world’s most-used cooking oil, said Mistry, according to remarks at a conference in Shanghai.

Futures will drop to about RM1,900 a tonne, he said.

That is 9.6 per cent below Monday’s close on the Bursa Malaysia Derivatives and would be the lowest price since March 2009.

“It is almost impossible to forecast a bottom at this stage of the production cycle,” Mistry said.

“However, producers are still very much in the money and I do not foresee prices going below cost of production.”

Mistry’s address echoed comments that he made in emailed remarks to Bloomberg News last month, when he said the “world is awash with vegetable oils” and forecast that palm oil would drop towards the cost of output.

Palm oil’s drop hurt shares in growers this year.

Palm oil prices are expected to strengthen in the final quarter on lower production, and there is a better outlook for 2015 as biodiesel demand may increase, RHB Investment Bank Bhd said in a September 10 report.

The bank said it remains “overweight” on plantation stocks in Indonesia and Singapore.

CPO prices dropped 21 per cent this year to RM2,101 a tonne on Monday. Prices fell to a five-year low of RM1,914 on September 2, then rebounded after Malaysia scrapped an export levy for this month and next month.

Full-year output in Malaysia, the second-largest grower, will probably be more than the 19.7 million tonnes to 19.9 million tonnes initially estimated, Mistry said.

In the first eight months, supply was 12.76 million tonnes, 991,000 tonnes more than a year ago, while exports dropped 6.6 per cent to 10.99 million tonnes, he said.

Stockpiles will continue to rise and peak in December.

Reserves in Malaysia jumped 22 per cent to 2.05 million tonnes last month from July, the biggest percentage gain since October 2009, Malaysian Palm Oil Board data show.Bloomberg

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