Plantation may consolidate soon

Plantation sector has been having a fine run-up. In the past 3 months alone, the Plantation index has jumped from 2996 on Jun 20 to a high of 3742 on Aug 14. As noted in my previous posts, the Plantation index may test its all-time high of 4043 done in Jan 1994. To do that within the next few months would require Plantation index to do a parabolic rise.

What do you need to achieve that? Firm price for CPO. More output coming on-stream. What about demand for all those additional CPO output? Well, there is the growing demand from China & India. What else? There is the new source of demand from the Biofuel sector, courtesy of the strong price of Crude Oil. All these were present in the past few months and they have helped to push the share prices of plantation stocks so strongly that 3 favorite plantation stocks have surpassed the targets set by analysts, according to a report that I've read. The 3 stocks are PPBOil, IOI Corp & KLKepong. Smaller plantation stocks have moved up and even Kumpulan Guthrie has moved from a low of RM2.56 in Jun to a high of RM3.84 on Aug 22.

At times like this, you need to ask the all-important question: Is there anything that I have missed out? Is this the Best of the Best? If the answer to the first question is probably “No” and to the second one is likely to be “Yes”, then you have to be wary. You need to know what would happen to the price of CPO if the off-take (or demand) cannot match with the huge jump in output. In the last few years, we have all been blanketed from time to time by haze, which originated from Indonesia. The haze tells a story of the wholesale clearing of forest for the planting of oil palm. Indonesia will emerge as the largest producer of palm oil, with an output for 2006 estimated to be about 16.4 mil tonnes as compared to 15.7 mil tonnes to be produced by Malaysia. Indonesia has 3.7 mil hectares of planted oil palm estate currently (which matches that of Malaysia) and another 6 mil hectares available for planting in the next few years. Even if you ignore the new area to be planted, the additional area that will come into maturity will increase & so will the output of palm oil. The demand for palm oil for biofuel is dependent on regulation and the price of diesel (or, crude oil). During the current boom in the price of crude oil, biofuel demand & its corollary demand for palm oil may be strong. What would happen if the price of crude oil retreats from its current height to a more pedestrian level? Would the demand for palm oil for biofuel evaporate? Can the consumption demand alone absorb all the increased output of palm oil?

As always, the chart may show us where the market is now. From the daily chart (Chart 1), you can see that the Plantation index is in a ST uptrend with support at 3620. The Bollinger Bands have tightened & the market is awaiting the completion of the current correction. There is currently no hint as to the future direction of the index. Since the index is in a ST uptrend, the probability favors the index going higher.

From the weekly chart (Chart 2), you can see that Plantation index is at a crossroad. The Bollinger upper band has started to flatten out. This is normally the precursor to a decline in the Bollinger upper band and a correction on a longer timeframe for the index. You may compare the current standoff to the consolidation in April 2004.

















Chart 1: Plantation index's daily chart as at August 29


















Chart 2: Plantation index's weekly chart as at August 29