Tuesday, September 12, 2006

Return Of The 'False Kings'
Plus, The Temporary Demise Of Plantations

As we are still in a generally uptrending market, the correction in second and third liners seem to be over for now. Major bourses were affected by a sharply lower oil price and similar weakness was to be found in many commodities and its related stocks as well. Again, I have to stress that we do not want oil prices to drop sharply and significantly as it may propel inflationary forces. Though second and third liners have recovered somewhat today (e.g. Iris, Mobif, DCIB, Tebrau, Sanichi, etc..), I do not think syndicates are well at all, plus at the back of their minds they have Bursa/SC with strong big canes aiming and waiting for them. Thus I do not believe the recovery in second and third liners will be a prolong one, just bringing up the bottom a bit, punters should not be overly excited.

The sharply lower oil prices at US$65 would cause a natural correction in certain palm oil stocks, particularly those with planned biodiesel plants. One thing that investors must be aware is to note why certain big plantation companies have not ventured to build biodiesel plants yet. That should be a clue. Biodiesel is trendy thanks to exceptionally high oil prices. However, if we were to take into consideration the duties and taxes plus logistics, biodiesel (palm oil) would only be worth producing provided oil prices stay above US$55. Having said that, most governments would want to encourage alternative fuels, hence they will provide relief via tax reliefs, subsidies, etc... thus making it possible to operate profitably even if oil were to fall to US$50 even.

Larger plantation companies such as KLK, IOI Corp and PPB have not really ventured into biodiesel owing to its incomplete business model. the delivery, logistics and acceptance. The viability and conversion of engines, plus efficiency and performance issues. If I was running a plantation company, I would not invest yet in a biodiesel plant also because, the real benefits is in higher palm oil prices and not biodiesel because there are players entering the segment left, right and center ... biodiesel has very low barriers to entry, there is nothing one can do better or has an edge. Its just another demand or downstream product. So if a company is into olein products already, its justthe same as in biodiesel, just another segment. We must remember, there is not much first-mover advantage here. Plus the biodiesel producers do not really make supernormal margins, sure the margins now are healthy but not excessively so and wouldn't be for long.

Hence, the best play would be to have exposure to maturing plam oil as they will reap more benefits on higher prices over the next 2 years. Biodiesel will already produce a new segmental demand and push prices higher - that is reality. Still prefer KLK, B Kawan and PBB Oil Palms.

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