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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