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Palm oil taking a breather, set to soar

KUALA LUMPUR: Palm oil has lost 6.4 percent from record levels it hit in June but prices will rebound soon and test new highs by the end of the year, as the world’s appetite for biofuels grows and production remains stagnant.

This should help plantation firms, which earned record profits this year, to reap plentiful returns again next year, analysts said, adding that shares of these firms would be a top choice among investors in the region. Palm oil hit a record high of 2,764 ringgit a tonne in June but has since backtracked and the benchmark December contract was at 2,586 ringgit in late trade on Tuesday.

“The 3,000 ringgit level is reachable and it could be as early as December because we are now entering a down cycle in production,” said one Malaysian trader.

“The climb is going to be very fast, judging from the covering being done by refiners and importers,” he added.

Palm oil has lost ground in recent weeks, along with other commodities and weak global markets generally.

But Dorab Mistry, a leading industry analyst, told Reuters last week that palm oil supplies from November would fall, which would help prices to rise again. He has forecast palm oil prices to hover in the 2,600-3,000 ringgit range in the near term.

“Production is not good enough. A lot of refiners are struggling to run their refineries. Although the margin is there, they cannot get hold of supplies,” said one trader based in the Malaysian state of Johor.

Malaysia is expected to produce less than 16 million tonnes of crude palm oil in 2007, against an earlier estimate of 16.7 million tonnes, while Indonesia’s output it estimated at 17-17.5 million tonnes.

Fighting for acreage: One hedge fund manager said prices in the first quarter of 2008 would remain high. “That coincides with lower production in Southeast Asia and Chinese New Year when demand is strong.”

Analysts said the real strength in palm oil market would come from the limited scope to boost world oilseeds production to meet the surge in demand from food and fuel sectors.

“The key bullish factor is the fight for acreage,” said Tan Tingmin, a plantation analyst with Credit Suisse.

“There is fight for acreage between grains and oilseeds. Wheat prices have gone up so much in the last few months. So if you are a farmer, you are more likely to plant wheat than oilseeds.”

She pegged the crude palm oil average price next year at 2,500 ringgit a tonne but said it was a conservative estimate. “It is looking a bit conservative. The average might actually go up to 2,600 to 2,700 ringgit.”

Thomas Mielke, editor of the Oil World publication, has forecast a global oilseeds production shortfall of 13 million tonnes in 2008 because of lower crops in China, Australia, Europe and North America.

The Malaysian plantation index has risen 50 percent so far this year, led by gains in sector bellwethers such as IOI Corp, Kuala Lumpur Kepong Bhd and Golden Hope.

“If crude palm oil prices are going up, then every plantation stock is going to go up. Now, it is the question of which stocks are more liquid so that you can get in and get out,” said Credit Suisse analyst Tan, putting her bets on Synergy Drive, IOI Corp and Kuala Lumpur Kepong.

Smaller plantation firms, such as Asiatic Development Bhd and IJM Plantations, could also offer strong returns. “Asiatic and IJM are pure plantation players and they will go up in tandem with CPO prices,” said Alvin Tai, an analyst with OSK Investment Bank.

Analysts are not expecting consumption from the food sector to suffer because of high palm prices, as top buyers would cushion the impact of the price rise with lower import tariffs.

“I don’t see an impact on consumption because Chinese and Indian demand is very constant and grows every year by 6 to 10 percent,” said Yin Shao Yang, a research analyst at Kenanga Investment Bank. Another analyst said: “India has reduced duties in the past to help the people and they will have to do it again.” reuters

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