Palm Oil – Our Last Bastion of Hope!

CPO prices have eroded by about 27% from its all time high of about RM4,486 per tonne in March 2008. Of course, it dragged down the plantation stocks as well. Concerned are on Malaysia’s palm oil stock of about 2.1 million tones in June08 – the highest in 25 years (since 1983), which definitely do not bode well for CPO prices. On top of that, international news-flows are not supportive with the EU has come under heavy criticism as its biofuel target has been blamed for rising global inflation.

Question – is that the beginning of an end of commodity bull in Malaysia? Is China abandoning its long held policy in locking in supplies of critical commodities? None of China company has bought a significant stake in any palm oil company. Or could there be the case that these sovereign wealth funds, US pension and endowments, which have partly been blamed for the rising commodity prices, are backing off to reflect the heats?

Compared to other vegetable oils, palm oil is still relatively cheap and it is one of the critical elements to manufacture other essential products like cosmetics, detergents, chemicals (paints, grease) and food products like cakes, chips, mayo, margarine etc.

Perhaps, the current selling is a buying opportunity and the resumption of bullish trend is a matter of time, especially US dollar weakness is likely to stay for quite a while.

The twentieth century saw three long commodities bulls – 1906-1923, 1933-1953 and 1968-1982 with each lasting an average of a more than 17 years. The recent commodity bear market ended in 1998 or 1999, when prices were approaching 20-year lows. Going by that count, this millennium of commodity bull is likely not to last before 2016.

So, at today’s price, when I factor in inflation, there is still plenty of room for most commodities to go even higher. My guesstimate is excluding the possibility of ware, political chaos and terrorism, which is a sufficient not necessary condition for prices to test a new high.

Remember this! No bull market in any asset has ever gone straight up; periodic corrections will always occur. A consolidation is caused by a glitch in the supply-and-demand relationship and I strongly believe commodities are tangible assets that offer different characteristics and no credit risk.