KUCHING: Amidst rising concerns on shrinking global supplies of palm oil following disruption of harvests in producing countries, analysts believed that the higher-selling price should make up for the lower volume.

GOING UP: A worker collects palm fruit at an oil palm plantation in Malaysia. CPO prices are forecasted to cross the RM4,000-barrier in the first quarter of 2011, according to ECM Libra’s Ching. (Photo source: Roundtable on Sustainable Palm Oil Organisation)

On Monday, crude palm oil (CPO) rose to the highest price level in more than 33 months, with March-delivery futures advancing as much as 1.6 per cent to RM3,850 per metric tonne (around US$92.16 per barrel) on Bursa Malaysia’s Derivatives Exchange. Yesterday, it opened at RM3,824.

It was reported that CPO futures had advanced by 68 per cent in the past six months amidst anticipation of a tightening in the supply of cooking oils as dry weather in Argentina hurt the crop in the top soybean-oil producer, while excess rains affected oil-palm harvests in Indonesia and Malaysia – two of the biggest global producers of the tropical commodity.

“High palm oil prices are great for plantation companies,” observed ECM Libra Capital Markets Sdn Bhd’s head of research, Bernard Ching in response to an e-mail yesterday.

“For notable names like Sime Darby, Genting Plantation, Boustead, TH Plantation and even Sarawak’s very own SPOB, higher selling price means more profits. Even if they might experience lower yields because of the rains, the high prices will make up for this shortfall in supply volume,” he added.

According to the Economic Research Service of the US Department of Agriculture, vegetable oil reserves were forecasted to touch a seven-year low at the end of this season. Data from the Malaysian Palm Oil Board showed that output in the country had declined to the lowest in five months in November, while stockpiles shrank for the first time in four months.

“Prices will cross the RM4,000-barrier in the first quarter of 2011,” said Ching.

However, he reiterated, “The general rule is that high CPO prices add to profitability. It is not a concern of supplies being low or us having less exports, because the high selling price will make up for the lower volume of supplies.

“With this being said, ECM Libra maintains its ‘overweight’ stance on the sector as we expect earnings to be on the uptrend with the high CPO prices.”

In a slightly different spectrum, TA Securities Holdings Bhd’s economist Patricia Oh noted that prices of plantation shares had remained ‘far away’ from their peak levels.

“We expect price recovery to be stronger this year on the back of increasingly bullish supply-and-demand outlook with the biodiesel theme coming into play, while the looming risk of fight for acreage between oil seeds will lift the profile of CPO as a substitute play,” she stated in an online note yesterday.

Having the second highest weightage on the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI), a rise in plantation counters would certainly push up the index as well, observed Oh.

“We have already raised our CPO price assumptions for the 2011/2013 by between 18 per cent and 23 per cent, respectively. Still, the average CPO price forecast of RM2,700 per metric tonne for this year is still considered ‘conservative’ against current market price.”

As with ECM Libra, TA Securities’ recommendation for the sector was maintained at ‘overweight’