26 April 2013

Palm Oil Stocks - Is It Worth to Buy Now?

Crude Palm Oil Price is trading around US$700 to US$800 range recently, with concern on weaker demand in China and India, as well as over supply and excess reserve of palm oil in Malaysia and Indonesia. As you can see the down trend from the image below, I believe it will continue the current trend, until the demand in China and India is picking up there.

Source: CME Group

If the production output remains unchanged, the revenue of the palm oil counters will retreat by at least 10%-20% due to the fall of palm oil price in the market. Now the question is, will this trend continue to reach another record low level, say US$600 or below? I doubt so, as the global economy is picking up now, and with relatively cheaper price compared to crude oil, I believe it is getting more reasonable to generate bio-fuel with crude palm oil now. Nonetheless, let's see how Malaysia and Indonesia, the two main contributors of Crude Palm Oil that account for around 80% of the global production to jointly deal with the recent palm oil price weakening.

To me, I prefer to have a relatively companies that are in the early stage of growth and manage to control the cost well. My first choice would be First Resources, although the 3rd month production this year is lesser than 3rd month last year, which I knew that was caused by "rest" of the palm trees. Addition to it, I also found that First Resources were buying additional Fresh Fruit Brunches (FFB) which I believe is for the refinery business. With that in mind, I believe First Resources could mitigate the price downward pressure risk by doing hedging as well as managing its operating cost in time to come.

I am still cautiously optimistic on long term prospect of palm oil industry. Let's look at it again 1 year later.

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