CPO price may have hit bottom amid disappointing production but prices could languish a little longer as speculative forces weigh on prices.  The weatherman has now warned of a potential return of  the  drought-inducing El Nino weather phenomenon in the winter.  We consider an El Nino occurrence, which has  a tendency to  curb  palm oil yield and drive up prices, highly probable  following back-to-back episodes of La Nina  in  the  past 2 years. This will serve as  the catalyst for a palm oil price rally. Maintain Neutral on sector, with selective buying of quality growth stocks.

CPO price carving out a bottom.  We believe palm oil price has declined to levels where it has  bottomed out. With production starting to struggle and inventory on the decline, CPO price should be very close to a bottom. China loses some momentum. China's vegetable oil imports for the first 4 months of the year  jumped  by a very commendable 29.1%, but this  represented a  slowdown in momentum as imports surged by some 38.9% in the first 3 months. On the other hand, India's buying momentum picked up from +35.3% y-o-y in the first 3 months of 2012 to +48.5% for the first 4 months of the year.

Speculation weighs on CPO price.  It is likely that the recent sharp decline in CPO price was due to weakness in the prices of other commodities. Soybean oil's speculative position has swung from a net long to a net short while soybean has seen some long liquidation from its record-high speculative net long position. Nevertheless, the speculative long for soybean is still high and there is still room to decline.

Hitting bottom.With  the  fundamentals supportive of higher prices but countered by speculative forces, we believe CPO price is in the  early stage of base building, which may take time. We continue to like growth stocks such as First Resources and Sarawak Oil Palm. We also like BW Plantations after its  recent price correction, as well as Kencana Agri, which is likely to have turned the corner.

Source: OSK