Alfi Fadhliyah, Bahana Securities | Thu, 06/17/2010 10:33 AM | Business

Moody has recently downgraded the Greece’s credit rating to junk status, due to concern over its capability to repay debts, to Ba1 from A3 previously. Although the cut has been widely expected, the contagion effect might be spread out not only to EU countries but also to other regions. It should be noted that the euro zone’s nominal Gross domestic Product (GDP) stood at around US$16,447 billion in 2009.

This contagion from the Greece deficit crisis has had a ripple effect on China’s export prospects, as the world’s third biggest economy. China’s high percentage of exports as a percentage of GDP, at around 24 percent, might produce an adverse impact on its economic  growth.  Of 2009 total exports, 20 percent were coming from the eurozone.

We, thus, believe that the potential economic slowdown in the EU will heighten uncertainty in the global economic outlook, which would in turn affect commodity prices. Additionally, the overheating in the China property market has alarmed the potential slowdown in the economy, which would lead to a slowdown demand for commodities, including crude palm oil (CPO). 

Based on Oil World data, the 2010 worldwide CPO consumption would continue to be driven by India and China as they account for 15 percent and 14 percent of the world CPO consumption. It is followed by the EU, accounting for 13 percent of total consumption and is expected to grow by 3.7 percent. 

Ironically, we are rather pessimistic on the EU’s growth outlook on the back of the recent debt crisis. 
Moreover, the new record high of soybean supply, as a substitute product of the CPO, from South America, might produce pressure on demand for the CPO.  As the average price for the CPO is expected to remain weak and less exciting over the next 12 months, we maintain our neutral rating on the sector.

It is worth noting that Europe accounted for 26 percent of Indonesia’s CPO exports for the first quarter of this year (1Q10) (chart overleaf), the second highest after India.

It is worth noting that the 2Q10 average CPO price of $745 per metric ton, 2 percent Q-Q higher from the 1Q10 average of $734 per metric ton, but it is 32 percent higher when compared to 2Q09, with the average price of $665 per metric ton.
Thus, we believe that in the near term, the upside for the CPO price will be limited with more possible downside risk.

 
According to an industry player from Cofco Grain & Oils Corp., China’s CPO stockpiles at ports have reached a record of more than 800k metric ton at end of May as China had stocking CPO since the beginning of the year. This has encouraged China to reduce its CPO imports in the second half. Out of the six plantation companies under our coverage, we prefer LSIP due to its prime tree age profile, product diversification into rubber business, and zero exposure to the EU.

By Jakarta Post