SINGAPORE (Jan 29): While upstream palm oil players are most affected by the volatility in crude palm oil (CPO) prices, CGS-CIMB Research reckons that the recent correction presents an opportunity to accumulate these stocks.
In particular, the brokerage favours Wilmar International and First Resources, which are down year-to-date, but are trading higher today.
As at 12.34 pm, the former traded up 3 cents or 0.7% at $3.98 and the latter traded 3 cents or 1.8% higher at $1.70. Both counters saw trading volume of 1 million and 107,700 shares, respectively.
According to CGS-CIMB, the most active palm oil futures price for April 2020 delivery fell by its 10% daily limit or RM286 per tonne to RM2,575 per tonne, today.
It notes that the previous largest one day drop for CPO futures price was on Oct 23, 2008, during the global financial crisis, when it fell by 10.3%.
“This represents the worst drop in more than 11 years,” CGS-CIMB analyst Ivy Ng Lee Fang writes in a note dated Jan 28.
CGS-CIMB says it maintains its average CPO price of RM2,300 per tonne in 2020 and RM2,400 per tonne in 2021.
The brokerage says that the sharp decline in CPO futures price could be due to panic selling on concerns that the rapidly spreading coronavirus in China will negatively impact global growth and demand for palm oil.
This could be further aggravated by concerns over potential defaults by palm oil buyers, potential margin call by brokers and potential shorts by investors, it adds.
These parties are looking to hedge their long position in the RBD palm olein futures at the Dalian Commodity Exchange (DCE), which will only reopen for trading on Feb 3, it explains.
In addition, the meteoric rise in CPO futures to RM2,829 per tonne on Jan 24, from RM2,214 per tonne in mid-October last year, could have led to profit-taking.
Still, if precedence is anything to go by, CGS-CIMB reckons that the impact of the coronavirus outbreak on palm oil demand will be limited.
Pointing to the outbreak of the Severe Acute Respiratory Syndromein in 2003, which was contained, the brokerage notes that China palm oil imports grew 25% in 2003. This suggest that the fallout in demand was limited.
“The key difference today compared to 2003 is that the palm oil price is more closely linked to the crude oil price as biodiesel accounted for 20% of palm oil usage in 2018 versus under 4% in 2003,” says Ng.
Also, Chinese ports have palm oil stocks of 842,700 tonnes as at December 2019, which are high compared to 500,700 tonnes as at December 2018.
“As such, palm oil exports may weaken in Feb on the back of the above factors unless the spread of the virus can be successfully contained soon,” she adds.
