After slightly dropped in May - June, in the last two months the Jakarta
Composite Index (JCI) continue to rise until closed at 5,199. If the uptrend
continues, it is only a matter of time before the JCI would break a new high (the
highest position of JCI is 5,251, which was reached in May 2013). In a bullish
period like today, almost all of the stocks gained significantly. However,
shares in the oil palm plantation sector declined about 10% (in average) in the
last two months, while their financial performance in the second quarter of
2014 was fairly good with growing net income. What's wrong?
If you are already familiar with commodity stocks, then you will easily
find out that the cause of the decline in stocks of oil palm plantations is due
to a decrease in the price of crude palm oil, or CPO. Based on data from Bursa Malaysia (Malaysian Exchange), the
latest price of CPO is RM1,987 per ton, and interestingly, this is the lowest price since 2009. In mid-July 2014, the price
was still at RM2,400 per ton, before then suddenly dropped all the way to its
current position, or fell more than 15% in just a month. If drawn from its peak
position during the year 2014, namely RM2,910 per ton (recorded in March), the
CPO price has dropped more than 30%, and continues.
So what caused the decline? Some analysts and the media mention the
increase in CPO production volume, which might caused oversupply, while on the other hand, the CPO sales volume, in this
case the volume of exports of CPO from Indonesia and Malaysia (as the world's
major palm oil producers) to the rest of the world, went down, which probably
was due to declining demand. And
indeed if we use the data from PT Astra Agro Lestari (AALI), one of the largest
palm oil companies in Indonesia, they produced 973 thousand tons of CPO during
January to July 2014, an increase of 16.6% compared to the same period in 2013.
While based on data from the Association of Indonesian Palm Oil Entrepreneurs
(Gabungan Pengusaha Kelapa Sawit Indonesia/GAPKI), the total volume of Indonesian
CPO exports during January to June 2014 was 9.8 million tons, down 7.7%
compared to the same period in 2013.
However, because the increase in CPO production was actually not too
significant (less than 20%), while the decrease in the volume of exports was also
not significant, then it cannot justify the ‘crash’ in CPO price which reached
more than 15% in the last month. And in fact, if we look at the pattern of CPO
price movements in the long run, the price of CPO (and maybe other commodities
too) tends to move wildly without a definite pattern, and with extreme fluctuations. The following picture
will shows you the movements of CPO price in the last ten years (July 2004 -
July 2014), taken from www.indexmundi.com.
Click on the image to enlarge:
Okay, take a look. During the two-year period between July 2004 - July
2006, CPO prices are likely to move sideways in the range RM1,300 - 1,500 per
tonne. Entering the second half of 2006, the prices started to rise.. and
continue to rise until it reaches RM3,700 as its peak in February 2008, or jumped about 150% within a year and a half,
whereas in two years earlier it was almost stagnant at all. Then, in June 2008,
CPO prices suddenly plummeted to return to RM1,500 per tonne in November, still
in the same year!
So if there is someone who analyzes the CPO price movements for four and a
half years between July 2004 until early 2009, he would find the fact that the
price of CPO, throughout the long period of time, in the end did not change at
RM1,500’s per ton. But he had to notice that the price was once rose to RM3,700
per tonne, before then turning back to RM1,500’s per ton. Does it make you
remembering the movement of penny stocks, does not it?
Entering the year 2009, CPO prices once again rallied until reach RM3,800
in early 2011, and I can see for myself that in the two-year period (coz I have
entered the stock market in 2009), many of oil palm plantation companies in the
country reap tremendous profits. But entering the year 2011, CPO prices fell
back to as low as RM2,200 per ton at the beginning of 2013, before then rise
until RM2,900 in March 2014, and again fell to its present price, that is already
below RM2,000 per ton.
Looking at the above facts, it is difficult to say that the price of CPO
can be simply influenced by the increase in production volume, or a decrease in
the volume of exports. Because of course, over the last 10 years, the volume of
production and exports of CPO could go up and down all the time, but how could
it cause the CPO price to skyrocketted of more than 150% from 2009 to 2011? Or
conversely, caused the price to slashed almost 50% from 2011 until today? In
the end, there are lots of factors that cause an increase/decrease in CPO
prices beyond a matter of supply and demand, like the news about El Nino, the
development of biodiesel projects, rise and fall of the price of substitute
commodities (soybean oil, sunflower oil, etc.), the policy of import duties by the
Government of India and China as the main destination of Indonesian CPO
exports, tax developments in the country, the length of wet and dry seasons, and
so on.
Because of sooo many factors that influence the price, you will eventually
come to the conclusion that the movement of CPO price can not be predicted, because it has no pattern, so it can not be analyzed using technical analysis (by
looking at the charts) moreover the fundamentals (supply and demand factors).
In the above I mentioned that CPO prices may still be down, but who knows that
at the end of 2014, the price may return to RM3,000 per ton instead?
That's why, as you already know, Warren Buffett does not like commodity
stocks, because the price may easily ups and downs depending on the price of
the commodity itself, while the price of these commodities can go up and down
at any time, often with extreme fluctuations. But the question, if I had
already buy some oil palm plantation stocks, then what should I do? Well, in
this case there are a few things you should consider.
The Industry of Palm Oil in Indonesia, at This Moment
First, I’m not so sure with the other palm oil companies, but the three palm
oil companies with the best fundamentals in the Indonesia Stock Exchange (IDX),
ie Astra Agro Lestari (AALI), PP London Sumatra (LSIP), and Sampoerna Agro (SGRO),
they, in this year, obtained all of their income from domestic market, ie did
not export at all. So the prices of CPO produced by these companies are no
longer influenced by the international price of CPO in Malaysia. Take a look: The
average price of CPO of AALI in January - June 2014 was Rp8,700 per kg, up
31.5% compared to the same period in 2013, and still higher than the average
CPO price throughout the year 2013, ie Rp7,322 per kg. And currently, based on
data from the Office for Joint Marketing
of PT Perkebunan Nusantara (KPBPTPN), the price of CPO for auction on
August 22, 2014, was settled at Rp7,940 per kg, or once again, still higher than
the average price in 2013.
While in fact, as already mentioned above, the current CPO price on Bursa
Malaysia is already lower than in 2009. In 2009, precisely in March when the
price of CPO on the Bursa Malaysia was around RM2,000 per ton, the price of CPO
of AALI is Rp7,000 per kg (based on the auction data at the time). But today,
when the price of CPO on the Bursa Malaysia back to RM2,000 per ton, the price
of CPO in Indonesia is still in the range of Rp8,000 per kg.
So, if you notice, on the First Half of 2014, the CPO sales volume of AALI
was actually dropped 10.3% compared to the same period in 2013, because they
eliminate the export, but the company's revenue still rose significantly due to
the increase in CPO selling price which reached more than 30%, and because of
the additional revenue from the sale of
olein. AALI dared to stop exports because they have started to process the
CPO into value-added/downstream products, in this case olein and stearin. While
another palm oil company, LSIP, also did not need to export its CPO because
they can sell it to its parent, Salim Ivomas Pratama (SIMP), to be processed
into downstream products, in this case margarine.
Then, SGRO, in 2013 the company had to sell some of its CPO to Cargill in Singapore
(aka export). But this year, SGRO could sell its entire production of CPO to local
customers, which may also processed into downstream products. This condition
had not occurred in 3 – 5 years ago, where almost the entire Indonesian oil palm
plantation companies sell their CPO directly without any processing, because
they did not yet have the ability to process CPO into olein or margarine.
In conclusion, I believe that the decline in CPO prices on Bursa Malaysia
will not significantly affect the financial performance of the palm oil
companies in Indonesia, especially the ones that mentioned above, because the current
condition is different from the condition in the last few years, where the palm
oil industry in the country is now more independent.
CPO prices on Bursa Malaysia could Rebound at Anytime
It was the first. Secondly, although the price of CPO on the Bursa Malaysia
(or at Rotterdam Port) may not have too much influence on the financial performance
of oil palm plantation companies in the country, but it must be admitted that
the influence is still there, because the palm oil companies keep looking at
the CPO price in Malaysia in determining the selling price of their own CPO. You
can see that the CPO price in the local auction market is down when the price
of CPO in Malaysia fell (though not as significant as in Malaysia). So if the price
of CPO in Malaysia continues to decline, then the revenue of AALI et al would inevitably
be affected as well. In addition, for foreign investors/traders who hold the shares
of oil palm plantation companies on the Stock Exchange, they only see the international
price of CPO in Malaysia in determining their positions, because they do not
know about KPBPTPN (or maybe you did not know too?).
Therefore, the decline of shares of palm oil companies that occurred in the
past month may continue if the price of CPO on Bursa Malaysia continues to down.
But on the other hand, what if the price later rebound? Well, of course the
stocks will rise back. If we look again at the chart above, each time the price
went down, then the decline is usually extreme, like 30% from its peak position
(just like today). However, about when the decline will stop and then rebound, it
is no one knows.
And interestingly, once again if we look at the chart above, when CPO price
is dropped, the decline will occur continuously without any pause (the CPO
price continues to fall every day in the last month, without ever stop even for
one day). Conversely, when the price was rising, the increase will also continuously
without pause! Hence, I said that who knows, if at the end of 2014 the CPO
price can rise back to RM3,000 per ton? CPO is a commodity that, no matter
what, is still needed by the entire population of the world, including
Indonesia (can you live without cooking oil that made from CPO? I don’t think
so). So no matter how deep the decline, but in the end the price will rebound
and rise.
In conclusion, taking into account that the palm oil industry in the
country is no longer too dependent on CPO price in the international market,
and that the price of CPO (in Bursa Malaysia) could go up at any time, then the
decision to sell your palm oil shares may be a wrong decision (I received a lot
of emails asking about this). In the end, in this year of 2014, oil palm plantation
companies recorded good performance. If their financial performance in the upcoming
third quarter is slightly depressed due to the drop in CPO prices, but the net
income of AALI et al should be still higher than the year of 2013.
New Project: Biodiesel!
But indeed, because on the other hand we also do not know when the decline of
CPO price will stop, then you might sell a part of your holdings, but do not
forget to keep looking for opportunities to buy it back. I still think that the
palm oil sector is very interesting because, in addition to the fact that the performance
of the palm oil companies began to improve in 2014, the election of Jokowi - Jusuf Kalla as President and
Vice President of Republic of Indonesia for the next five years gave positive
sentiment that the project of CPO
conversion into biodiesel to substitute the fuel, which have been proposed
by the government since long ago but its realization was too slow (which may
because Sir SBY has been too busy working on many other projects, while Mr.
Boediono and the ministers, with all due respect, can not do anything), will be
accelerated. As we all know, Mr. Jusuf Kalla has a convincing track record when
he was able to quickly execute the grand-project of conversion from kerosene to
gas for household needs. So with his return to his position as the Vice
President, there is a great expectation that this biodiesel project can also be
done quickly (still remember the motto 'the faster, the better'?).
Because on the other side, the project has been very urgent to make the
Government have an alternative source to fulfil the needs of fuel for
population, rather than continuous importing the fuel, which in turn can reduce
the burden of the state budget because of the fuel subsidy. Mr. Jokowi himself,
in one of the presidential debate some time ago, had stated that one of his
focus (if elected as President) is to develop renewable energy sources, in this case ordered the Pertamina (state
oil company) to open the market for biofuels/biodiesel, and give incentives to
companies that have the willing to develop the biodiesel industry. If you look
at the fact that AALI et al were already able to develop olein and margarine,
then the palm oil industry in the country only requires a little more support
from the Government, whether in the form of tax incentives or the like, to then
begin developing biodiesel projects.
And if this biodiesel project can be fully realized (there are already
several biodiesel producer companies in Indonesia, but the number was small),
then the price of fuel does not need to be raised, the state budget was saved,
while the oil companies in the country can continue to boost the production
volume without worrying that the price of CPO in the international market will
go down due to oversupply, because the whole CPO production will be absorbed to
the needs of domestic biodiesel production. And last: Indonesian economic
growth can rising significantly. Everybody’s happy, everbody’s win! Then when
all of this will be realized? Well, hopefully, as soon as possible.
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