CPO broke its long-term uptrend line

Last Friday, CPO closed at RM2786. Look at my "constructed" chart, consisting of 3 weekly charts of which Chart 2 & 3 were reduced in size to fit with Chart 1. You can see that CPO has broken below its long-term uptrend line at RM2900. Its immediate support levels are RM2700, RM2400 & RM2000.


Chart 1: CPO's weekly chart from October 2008 to October 7, 2011 (source: ifs.marketcenter.com)

The breakdown of CPO's long-term uptrend line may explain why two of the blue chip plantation stocks began to buckle in the past two weeks. UTDPLT & KLK, which have held up very well during the past 2-3 months, are beginning to see some selling pressure. Fundamentally, there were some explanations given for this selling. One of which is increased supply of CPO (how else would the price comes under pressure?). However we must note that the lower selling prices for CPO may not necessarily translate to lower profit for plantation companies as their output has increased.

The crazy days of CPO trading above RM3000 has led to many enterprises venturing into the oil palm plantation sector. We have seen the prices of plantation land skyrocketing from a few thousand ringgit per acre to RM20,000-30,000 an acre in some parts of Malaysia. Many Malaysian companies have ventured to Indonesia where plantation land is cheaper. This led to wholesale clearing of jungle for new oil palm estates and massive open burning. This unhealthy practice would lead to many parts of South East Asia being enveloped by haze over the past few years. This massive cultivation of oil palm would ensure that the world will be amply supplied with CPO for many years to come. Economics 101 teaches us that over-investment in any economic sector would result in over-supply & lower prices for the output of that sector while under-investment would result in under-supply & higher prices for the output of that sector.


Chart 2: UTDPLT's monthly chart as at Oct 3, 2011_plotted on log scale (Source: Tradesignum)



Chart 3: KLK's monthly chart as at Oct 3, 2011_plotted on log scale (Source: Tradesignum)

Based on the bearish technical outlook, one should avoid trading aggressively in CPO. As for plantation stocks, you may want to reduce some position as the negative sentiment may result in further selling in this sector. However, as noted, plantation companies may be able to continue to report decent profit if its increased output can make up the drop in CPO prices.