We maintain our Overweight call on the sector. We believe the rupee’s weakness will only cause a temporary slowdown in India’s edible oil import. The currency has been weakening against the MYR and rupiah in the past 4 to 5 years but this has not prevented India’s palm oil imports from hitting record levels. Should an El Nino occur, it would severely curb India’s oilseed yield and prompt a sharp spike in its edible oil import, much like in 2009. Other than the lower palm oil yield, the India factor will be the major catalyst for a strong rally in palm oil price.
Shipment down in June. India’s edible oil purchase declined by 13% m-o-m in June to 770k tonnes, and could have fallen further in July, based on the 26% drop in Malaysia’s palm oil shipment for the first 15 days. There are concerns that the weakness in India’s import was due to the rupee’s weakness, which has impaired India’s purchasing power. However, we believe this slowdown is only temporary.
Currency factor not new. India’s rupee has been on a decline in the past 4 to 5 years. The currency has depreciated by 33% against the MYR and 26% against the Indonesian rupiah from the peak in late 2007. YTD, the rupee is down by an average 10% against the RM and 6.4% versus the rupiah compared to the 2011 full-year average.
Weakening currency equals record-high CPO price. Due to the currency’s weakness, the palm oil price in rupee terms has been hovering at record levels since early 2011. Average CPO and olein prices in rupee have been climbing for three consecutive years. While one should anticipate some form of demand destruction if prices reach excessively high levels, it is too early to tell if we have reached that point. After all, India’s 1H edible oil import is still higher by 34% y-o-y this year, while its palm oil import has risen 23%.
Maintain Overweight. We continue to think palm oil price will scale higher next year on the back of an El Nino-induced drought. Our favourite BUYS are Sarawak Oil Palms, Kulim, BW, and Kencana Agri.
India’s own crop production. About half of India’s edible oil consumption is met by imports while the balance is mainly from the crushing of internally produced oilseeds such as soybean, cottonseed, groundnut, rapeseed, and castor seed. Hence an important factor driving India’s edible oil imports is how well its crops turn out. However, this depends on the country’s rainfall during the June-Sept monsoon season. Up to now, India’s rainfall during the current monsoon has been 22% below normal. According to India’s Meteorological Department, 40% of areas received normal/excessive rainfall while the remaining 60% received deficient/scanty rainfall. Nevertheless, rainfall has improved in the past week. We believe that the jury is still out with regard to India’s production prospects in the current season but we fear it may worsen. The mild El Nino in 2009 resulted in India’s crop output falling off the cliff, thus necessitating a drastic increase in edible oil imports. Should another episode of El Nino occur, it is reasonable to expect India’s edible oil imports to spike up from current levels.
Source: OSK
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