Asia Palm Oil Sector - What goes up must come down - Credit Suisse

● La Nina is usually a non-event but the 2010-11 La Nina was one of the worst in history, leading to plantation stocks outperforming at end-2010. According to weather experts, La Nina should have already peaked; hence, the worst should be over. Palm oil prices could still spike to RM4,000/t with weather vagaries, but we believe this is unsustainable for a longer duration, as it leads to a slowdown in demand.

● Huge price volatility in 2011E, but palm oil prices may have already peaked: (1) speculative positions for soy, corn and palm oil are at record highs – vulnerable to profit-taking; (2) supply could surprise on the upside in 2011 (reversal of tree stress, higher new planting in 2007 and rising output from higher rainfall).

● Maintain UNDERWEIGHT. We have raised our 2011 palm oil price assumption to RM2,950/t (from RM2,300), but remain UNDERWEIGHT, as the stocks are fairly valued. YTD, plantation stocks have underperformed, but we expect further underperformance. We maintain UNDERPERFORM on IOI Corp and Sime Darby. Wilmar remains our only OUTPERFORM.