Friday, August 1, 2008

My View on CPO

CPO is finally corrected violently from $4,486 to less than $ 3,000. The picture below tells a good story of over-supply.

The next two questions that pop up naturally are: (i) how low can it fall? (ii) Is this a collapse of a bubble or merely a correction?

My views :-

(i) it is hard to predict how low it can fall because when you dealing with irrationality and panics – irrationality is irrationality. So, just wait for the knife to hit the ground and nobody talk about it for a long time to be defined as “unloved.”

(ii) A bubble will usually go up something like 600-700% over a long period of time, when it deflate, it will usually drop by 80-90%. 80% drop from $ 4,486 will be $ 897 which is cost of production, unlikely to fall this hard. I think we are in a correction but I have no idea how low and how long.

(iii) Has the long-term story change?

What happen to the story of taking at least 3 years to get additional supply on-stream? What about the story of China and India story for high food demand? How about the bio-diesel story? Or the story of demand destruction has set in? Or merely a knee jerk due to crude oil correction?

I would vote for vegetable oil moving in tandem with crude oil correction. Unless we are in US $ 30 barrel again, the story of bio-fuel is still much alive. However, cost of production / MT of CPO is about RM $ 1,000, while crude oil is about US $ 50-US $ 60 / barrel, assuming supply is not a problem, you will have a good feel of how much these oils worth, right?

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