CPO: Calm Before the Storm?

Many investors are aware of the sharp fall in the price of crude oil. How many of them are aware of the drop in other commodities prices? One of the developing stories that is getting a lot of attention now is the drop in the price of copper. The price of copper broke the strong support of USD2.70 a pound. It was quickly followed by a breakdown of the psychological USD2.50 mark. The next strong support could be the psychological USD2.00 mark & beyond that, USD1.50! See updated Chart 1 & Chart 2 (updated to Jan 12 only).


Chart 1: Copper's monthly chart as at Jan 13, 2015


Chart 2: Copper's long-term monthly chart as at Jan 12, 2015

The drop in the price of copper is stunning. It may reflect a world where supply of many commodities exceeds their demand. It could be a reflection of the slowdown in global economy or simply malinvestment due to excessive money supply everywhere.

Closer to home, we need to ask whether CPO supply has also exceeded demand. After all, we read every now and then reports that the government is extending export duty exemption for CPO in order to bring down CPO stockpiles.

CPO prices have risen by 20% in the past 5 months from RM2000 to RM2400 today. This may imply that the demand for CPO is still good. However, the increase in CPO prices may be due to the 15%-drop in our MYR vis-a-vis USD.


Chart 3: CPO's weekly chart as at Jan 13, 2015


Chart 4: USD-MYR's daily chart as at Jan 13, 2015

CPO is a global commodity. A good study of the trend of CPO prices is to look at the price chart plotted in USD. See the chart below.


Chart 5: CPO's long-term monthly chart as at Jan 13, 2015

We can see that CPO may have broken below its long-term uptrend line, S1-S1 a few months ago. This breakdown is as significant as the breakdown in the long-term uptrend, SS in 1998 when CPO prices dropped to USD200 a tonne. The 1998 price decline for CPO led to a sharp drop in the Plantation index. We may not have felt it then because all the stocks on the exchange dropped that year due to the Asian Financial Crisis. However, if the CPO prices were to trend lower drastically, plantation companies' earning will take a hit and their share prices would certain take a beating. Our Plantation index may have already broken its uptrend line, S1-S1.


Chart 6: Plantation's monthly charts as at Jan 13, 2015 (Powered by ShareInvestor.com)

If CPO prices were to drop drastically, the psychological impact would be very severe as the Malaysian economy, which is negatively impacted by crude oil price decline, would take another knock from lower export receipt. It could lead to further weakness for our currency and our stock market.

Let's hope that CPO prices & export would continue to hold up despite the technical breakdown.

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, CPO or plantation stocks.