Bad weather brought blessings for CPO

JAKARTA. The bad weather turned out to be blessing for plantation issuers, as La Nina has brought positive sentiment for crude palm oil (CPO) price rise. Furthermore, the storm is expected to be more deteriorated.

La Nina has affected to the increase in rain intensity that may be an advantage for improving the quality of palm products. However, the extremely high rain intensity may deteriorate the palm production. “Floods may interrupt (palm) production”, said Investor Relations at PT Sampoerna Agro Tbk (SGRO) Michael Kusuma on Tuesday.

Analyst at KDB Daewoo Securities Andy Wibowo Gunawan said that La Nina may occur in 2016 and 2017, as well as interrupt Malaysia’s CPO production in a short time. Aside of Indonesia, Malaysia is one of the biggest CPO producers in the world. “We are not sure that Malaysia can maintain the increase in CPO productions” Andy wrote in a research at the beginning of this week.

Similar with El Nino, La Nina may decrease CPO production and stock. The lack of supply and the increase in demand will drive the price rise. However, the demands for CPO from China tend to shrink, although China is the biggest importer of CPO in the world. However, Andy added that the demands from another country, such as India may cover the slow demand from China.

Since the beginning of 2016, the world’s CPO price stands at US$623.6 per ton. The shift on high demand for CPO from China to India is expected to increase CPO price to US$636 per ton in 2016 and US$674 in 2017.

The decrease in the volume of CPO production has indicated the price rise since the beginning of 2016. During the first semester of 2016, the volume of SGRO’s CPO production has decreased by 37% to 98,728 ton on year on year (yoy) basis.

Under that condition, the price of SGRO’s CPO has increased from below of IDR7,000 per kilogram during the first semester of 2016 to IDR8,000 per kilogram. “The price rise indicates the positive signs of palm oil industry”, said Michael.

One of the plantation issuers PT Astra Agro Lestari Tbk (AALI) booked the increase in CPO selling price from the average of IDR7,342 per kilogram during the first semester of 2016 to IDR9,765 per kilogram as per 20 September 2016.

However, the CPO price rise does not have significant impact on the index of plantation in Indonesia Stock Exchange. Since the end of 2015, agro business’ shares only grew by 4.13%. 

Andy prefers to maintain neutral ranking for the shares of CPO sector. Andy suggested investors to collect PT PP London Sumatra Indonesia Tbk (LSIP) and PT Sawit Sumbermas Sarana Tbk (SSMS). “LSIP has a healthy financial position, while SSMS’ young age-plantations will allow the issuer to grow (its business)” Andy said.

(Muhammad Farid/Translator)