Tuesday 13 March 2012

Plantation sector (Neutral)


Indonesian Palm Oil Pours in
Malaysia’s palm oil inventory rose to 2.06m tonnes in February due to the sharp increase in processed palm oil  imported  from Indonesia, without which the inventory would have been flat m-o-m. We suspect this is temporary and will only artificially suppress palm oil price.  Although we believe palm oil price can still scale higher due to potentially disappointing production in the near term, we are concerned about a potential pullback in soybean price. On further price strength, we would suggest a tactical sell on plantation stocks. Maintain Neutral on sector.

Probably some upside still. We have yet to see the full impact of a seasonal decline in production, which could be sharper than usual due to the tail-end effects of the 1QCY10 drought which hit Sabah, Sarawak and parts of Kalimantan. We see no logic  for the record pace with which  Indonesia’s processed palm oil  is  flowing  into Malaysia and believe this is temporary in nature. Nevertheless, this is triggering a pullback in palm oil price as the market was expecting inventory to decline to 1.9m tonnes.

Soybean vulnerable to pullback. While the market continues to be concerned about disappointing soybean yield from drought-stricken South America, the near record speculative long position suggests that a lot of expectations have been priced in. Regardless of how the actual yield turns out, completion of the harvesting season will remove the uncertainties and long liquidation will take place. This is especially so with prevailing Enso-neutral conditions, which will bode well for the upcoming North American planting season.  Although it may not happen just yet given the narrow discount of USD80 per tonne that palm oil is currently trading at against soybean oil, a correction in soybean price could spark off a sharper correction in palm oil price.

Maintain Neutral on sector. We  are maintaining our Neutral call on the sector. Our view that palm oil price will undergo a price lull after some excitement in 1Q is unfolding as expected. Though the average palm oil price of RM3,163 exceeds our assumption of RM3,000, we think it is too early to raise our price assumption as some price weakness could be seen in 2Q and 3Q.

Source: OSK188

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