Palm oil prices near the bottom?

The price of palm oil, down 67% from a Mar record, is near the end of its decline because supplies will slow and demand for the edible oil will ride out the global slowdown, Goldman Sachs said.

The price is "to a bottom," analysts led by Patrick Tiah in Singapore said in a report. " Edible oil demand has remained relatively resilient even during severe recessions."

The prices of crude oil and other commodities have tumbled this year on concern the worldwide economic slump will reduce demand. Malaysia and Indonesia, the largest producers of palm oil, are felling oil palms and planting younger saplings to cut output. Palm oil is their biggest agricultural export.

The price of the edible oil, based on previous cycles, is mainly driven by supply, Goldman said in a report. The replanting will help reduce output, while the yield from plantations is under "stress," Goldman said. It’s not clear when any rebound will happen, according to the report.

Palm oil, used in cooking and to make biofuels, on Mar 4 reached a record 4,486 ringgit (US$1,236) a tonne in Malaysia.

Still, Goldman cut its price forecast for palm oil for the next 2 years by between 41% and 50%, joining analysts at CLSA Asia Pacific-Markets and UBS AG. Palm oil will probably fetch 1,000 ringgit a tonne in 2009, and 1,250 ringgit in 2010, analysts at CLSA said in a Nov14 report. UBS on Nov 6 cuts its price forecast for 2009 by 31% to US$450 a tonne.

Palm oil prices the next 2 years

Palm oil prices in Malaysia next year may trade on average 32% lower than current levels, partly because of oversupply and fading demand for biofuels, CLSA Asia- Pacific Markets said.

Palm oil will probably fetch 1,000 ringgit (US$278) a ton in '09, and 1,250 ringgit in '10, analysts at CLSA Asia-Pacific Markets in Kuala Lumpur said in a report. The '09 forecast is 64% lower than this year's projected average of 2,750 ringgit, James Gruber, a Kuala Lumpur-based analyst at CLSA, wrote in an e-mail today.

"Serious oversupply issues will take time to resolve," the brokerage said in the report. "The biofuels story is waning, providing less demand support."

Wilmar's 3Q08 results above expectations

Wilmar said 3Q08 net profit more than doubled to US$482.6 m driven by strong sales volume, higher margins. Goldman Sachs says the record quarter was above expectations, annualized performance came in 18% ahead of broker's own estimate, 20% above consensus. Says downstream margins very strong, margins benefitted from hedging, tight credit market curbed rivals. Adds balance sheet improved significantly; "the significant balance sheet improvement should also allay funding concerns for stock and convertible bond investors." Maintains Buy rating, target price not given.above expectations

AusGroup's outlook challenging

JPMorgan cuts AusGroup target price to $0.40 from $0.95 following recent 1Q09 results. Broker says engineering services company's results in line with expectations but outlook turned more challenging, "as operators begin to reassess their E&P plans, we believe the risk of a slowdown in orders from key customers is high." Adds declining commodity prices may also hurt demand in mineral, resources segment. Cuts FY09, FY10 net profit forecasts by 4%, 23%, respectively. But maintains Overweight rating on valuation grounds; "we believe that the year-to-date 85% correction in stock price has brought valuations to undemanding levels."

Singapore Petroleum Co - cautious Asian refining sector

Merrill Lynch downgrades Singapore Petroleum Co. (SPC) to Underperform from Buy to reflect caution over Asian refining sector, margin revisions in '09-'10; "additionally, we cite the company's accounting complexity and rapidly rising working capital as major risks." Cuts target price to $2.00 from $10.00 after changing valuation basis to trough cycle valuation from discounted cashflow model. Expects complex refining margins to fall if Asia heads into recession; "the unusual extent of the profit deterioration in 3Q08 and the lack of catalyst from a sector perspective lead us to recommend investors to exit the stock."

Beware! Big cut in tp. And with oil prices still likely to fall, may not be time to buy SPC yet.

Jiutian 3Q08 results

Jiutian Chemical was expected to report a loss of not more than RMB4m for 3Q08. In a report dated 29/10, DBS understood that DMF prices declined from RMB6400/tonne in 2Q08 to < RMB6000 /tonne in 3Q08 while methanol costs remain fairly high at close to RMB3000/tonne. Given such high methanol costs but depressed DMF prices, the 2nd DMF plant of 120k tpa capacity was not operating at all in the quarter. Profitability from its more efficient 1st DMF plant was also affected and thus unable to fully absorb the fixed costs as in the previous quarters.

DBS do not expect the 2nd DMF plant to contribute to revenue and a similar loss in 4Q08 for the group is highly likely. As such, they cut their FY08 net profit estimate by 72% to RMB10m. In their view, the deteriorating global economy and slowdown in domestic growth would drag demand for DMF and exacerbate the oversupply situation. They now expect the oversupply of DMF to persist into '09 instead of a recovery through industry consolidation. On the back of such bearish outlook, they trim their ASP and sales volume assumptions and slash their FY09 sales and profit by 37% and 56% respectively.

Given the lacklustre DMF market, their fair value on Jiutian is reduced to $0.03 from $0.15, based on 4x revised FY09 earnings (vs 9x previously).

For re-rating, Jiutian will need to deliver a few consecutive quarters of improving results. The formalization of Yong Mei’s investment into Jiutian’s methanol project and plans for asset injection into Jiutian could also be key catalysts for Jiutian.

Jiutian reported a net loss of RMB3.2m for 3Q08. This is slightly better than expected. The loss is largely due to:

1. Shutdown of the Group's second DMF plant in Anyang Jiuyang resulted in RMB9.2m of unabsorbed factory costs (comprising largely depreciation of the plant and fixed wages) incurred in 3Q08 and included in the administrative expenses;
2. The one-off expense of RMB2.1m in relation to a back-charge of value-added tax imposed by the tax authority over a dispute on the treatment of third party logistic costs for the delivery of goods to customers in FY06 and FY07;
3. Higher business activities from operation of the storage and distribution facility in Changzhou and the operation of the second DMF plant in Anyang Jiuyang;
4. Pre-operating expenses (comprising largely of amortization of land use rights, land taxes and wages) incurred for the new 250,000 tonnes methanol plant in Anyang Jiulong under construction of RMB2.7m;
5. Higher one-off professional fees incurred by the Group on projects undertaken and;(f) Higher finance costs arising from increase in bank loans and interest rates to finance the expansion plans and working capital.

Jiutian said that the first DMF plant of 30k tpa capacity in Anyang Jiutian operated below capacity as it faced shortages in the supply of key raw materials, namely water gas and steam which resulted in lower production of a key feedstock, methanol which in turned affected the production volumes for methylamine and DMF.

Average selling price of DMF was RMB6,673/tonne in 3Q08 whilst ASP of methanol was RMB3,078 /tonne in 3Q08. In line with the previous quarter's guidance, the second DMF plant is expected to operate well below its operational capacity until the Group completes construction of its 250k tpa tonne methanol facility in Anyang Jiulong, which is scheduled for completion by 1Q09.

With the anticipated completion of the methanol facility, Jiutian will be able to fully integrate its operations and will be better equipped to control its operating costs. Its results could start improving from 1Q09 or 2Q09 onwards, so I recommend a Accumulate on the stock.

UBS upgrades Venture

UBS upgrades Venture Corp to Buy from Neutral on valuation grounds but cuts target price to $9.00 from $11.00 on lowered margin, growth forecasts. Says, "Venture's valuation is attractive as it is at below trough level, and the company should be able to maintain its cash dividend payout and pay back its debt even under the worst case scenario." Lowers FY08 EPS estimate to $0.24 loss per share vs previous forecast of $0.91 profit per share, cuts FY09, FY10 EPS estimates by 43%, 21%, respectively, to factor in worst case scenario of write-downs of DMX investment, CDO exposure, goodwill from GES acquisition and assumption that overall business does not recover until '10.

Coal prices

Prices for power-station coal may fall further because of a potential oversupply and as the market returns to being driven by demand, currency and cost factors rather than by speculative investors, the McCloskey Group, an industry research body, said.

Coking-coal contract prices are expected to decline 57% next year as Asian steelmakers cut output because of weakening demand, BNP Paribas SA said in a report 6/11.

Crude Palm Oil Prices May Have Bottomed Out

Crude palm oil prices may have already bottomed out and are likely to be supported by a slowdown in production and a rise in demand, Hamburg-based vegetable oils analyst Thomas Mielke said 7/11.

Mielke, who is editor-in-chief of the Oil World journal, said current palm oil prices - at just 60% of soybean oil prices - aren't sustainable and are likely to rise.

"CPO prices probably hit the lows around 10 days ago. Soy oil and CPO prices may appreciate until the end of Nov, with some fluctuations," Mielke said, giving a price outlook during an international conference on vegetable oils.

On Oct 28, the benchmark 3rd-month CPO futures on BMD hit a 3-year low of 1,331 ringgit a tonne.

Mielke also said Malaysia's CPO production is unlikely to rise in '08-09 due to lower yields, compared with last year's actual output of 17.6 m tons.

He said CPO prices are likely to range between US$650/tonne and US$1,100/tonne, cost, insurance and freight Rotterdam in the medium term.

Soy oil prices are likely in the US$750-US$1,200/tonne range, free on board the Netherlands in the medium term, he added.

Hyflux more than doubles 3Q08 net profit

Hyflux sharply higher after the water treatment company reports more than doubling of 3Q08 net profit to $18.5 m on back of growing work in China, Middle East, North Africa. Credit Suisse says results in line with forecasts, company continues to expect strong growth in China, is encouraged by China's focus on infrastructure spending; maintains Outperform rating and unchanged $2.67 target price. But Nomura is more cautious, "we remain concerned at Hyflux's equity-dependent asset-light model;" puts current Buy rating under review with negative bias. JPMorgan says results were "robust," ahead of broker''s estimates due to strong performance in municipal sector, better-than-expected profit margin. Broker adds water sector outlook remains positive, company is addressing its financing issues; maintains Overweight rating with $3.00 target price.

Wilmar to invest in Fortune Gas Investment

Fortune Oil said that it finalised Shareholders Agreement and fulfiled all conditions precedent for Wilmar International to invest US$36 m in Fortune Gas Investment Holdings.

Following completion, Wilmar will hold 15% of the enlarged share capital of Fortune Gas, a Hong Kong registered company holding all of the Company's gas operations, including the gas distribution and coal seam gas business.

Completion will take place by Nov 5 upon payment of the subscription amount and the allotment of shares in Fortune Gas. On completion, Fortune Oil will own 85% of Fortune Gas, it said.

The funds raised will be invested in the growing gas distribution and coal seam gas business of Fortune Gas and will provide the funding required to continue the development of this business.

These funds are in addition to the GBP9.85 m raised by Fortune Oil through a placement of shares with Creation Investments Limited, a wholly owned subsidiary of Kerry Holdings Limited announced on Jul 4, the company said.

Fortune Oil announced on Sep 1, that the Company had also signed a conditional Subscription Agreement with Star Medal, another wholly owned subsidiary of Kerry Holdings for an investment of US$36 million for a 15% interest in Fortune Gas.

The Company and Kerry Holdings have mutually agreed for Kerry Holdings to continue to support the growth of Fortune Gas through Fortune Oil, and have rescinded the Sep 1 '08 agreement. Kerry Holdings continues to hold 4.74% of Fortune Oil's fully diluted share capital through Creation Investments, it said.

Revenues from the gas business continue to grow in line with expectations, with no apparent impact from the slow-down in China's GDP growth rate.

The Board of Fortune Oil does not expect the demand for gas from customers to be affected by the current changes in the global economy and the demand for natural gas as a clean fuel continues to exceed supply.

The Company will provide a detailed update of its operating performance in the Interim Management Statement, due to be released on Nov 10.