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Good to buy plantation counters now

KUALA LUMPUR (Bloomberg): PALM oil’s slump to a 5-year low offers investors an opportunity to buy plantation counters, according to Dorab Mistry, director at Godrej International Ltd, who says producers are still making money.

“I am often asked these days if oil palm plantation and palm oil processing company equities should be bought. My answer is a resounding yes,” Mistry said two days ago, 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 anticipated rebound in prices.

Palm oil fell to a 5-year low, two weeks ago, 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, the 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 at an oils and fats conference organised by the Malaysian Palm Oil Board and Malaysian Palm Oil Council, in Shanghai, recently.

The world is awash with vegetable oils. Futures will drop to about RM1,900 a tonne, he said. That is 9.6 per cent below Monday’s close of RM2,099 per tonne 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.”

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

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 world’s second-largest grower, will probably be in the region between 19.7 million tonnes and 19.9 million tonnes, Mistry said.

In the first eight months of this year, 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. 

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