Monday 13 August 2012

Regional Plantation - Palm Oil Carves Out Bottom

We  are  maintaining  our  Overweight  call  on  the  sector.  We  believe  the  inventory build-up  is  temporary  in  nature  as  the  substitution  effect  from  poor  US  soybean output  could  kick  in  as  early  as  next  month  when  US  harvesting  season  begins. Concerns of El Nino will also be renewed  as the Southern Oscillation Index (SOI) falls  to  negative  territory.  Our  CPO  price  assumption  remains  at  RM3,000  per tonne  this  year,  which will  remain  intact  even  if  CPO  price  continues  to  linger atcurrent  levels  with  YTD  price  being  close  to  RM3,200  per  tonne.  We  expect  CPO price to average RM3,500 per tonne in CY13. 
 
Temporary  weakness  in  export.  We  believe  the  slowdown  in  shipment  to  China  (-117.7k  tonnes  and  India  (-111.5k tonnes) is temporary. India’s slowdown in purchase last month should not be surprising after the torrid pace in the first six months. After this slowdown,  its  import  should  pick  up  steam  again,  especially  with  the  potentially  poor crop  output  this year. China’s import of palm oil,  meanwhile,  could  pick  up  due  to  the newly imposed price control on cooking oil, as palm oil is a much cheaper raw material compared to the alternatives.

Soybean’s strength to rub off on palm oil.  Palm  oil  has  been  languishing  despite soybean’s price strength. It  takes  time  for  soybean  supply  shortfall  to  translate  into demand  for  palm  oil.  Due  to  palm  oil’s  short  shelf  life,  buyers  will  not  stock  up
significantly  ahead  of  time  to  meet  the  shortfall.  The  substitution  effect  will  take  place when  the  market  starts  to  be  dependent  on  US  soybean  supply  from  the  upcoming harvest. USDA now expects US soybean production to come in at 2.69bn bushels, down from 3.05bn bushels it expects last month. This reduction of 9.8m tonnes of soybean will translate  into  a  further  reduction  of  1.8m  tonnes  of  soybean  oil  supply,  which  if substituted with palm oil will nearly exhaust Malaysia’s palm oil inventory.

Renewed  concerns  on  El  Nino.  The  SOI  is  now  back  in  negative  territory,  which  will renew  concerns  on  El  Nino.  The  US  Climate  Prediction  Centre  indicated  that  El  Nino conditions are likely to develop in August or September. This, plus India’s below average rainfall, should provide good support for palm oil price at current levels. 


MPOB STATISTICS FOR JULY 2012

Production  recovers.  Malaysia’s July 2012 palm oil production stood at 1.692m tonnes, 15.0% or 221.3k tonnes higher compared to June, as production maintains its seasonal upward trajectory. Peninsular Malaysia and Sarawak production rose 17.4% and 17.8% m-o-m respectively, while Sabah production increased by a much  tamer  8.0%.  Y-o-y  monthly  production  contraction  narrowed  significantly  from  16.1%  to  3.4%  as Peninsular  Malaysia  and  Sarawak  production  recorded  their  first  y-o-y  increases  since  February  2012. Production  in  the  peninsular  rose  2.9%  y-o-y,  with  Sarawak  output  increasing  by  an  even  stronger  9.5%. Sabah production continues to disappoint, dropping by 20.1% y-o-y. YTD production summed  up to 9.507m tonnes, 8.1% below that of the same period in 2011.

Exports plunge. Exports declined by 234.7k tonnes, or 15.3%, from June to 1.297m in July as the year’s tax-free  CPO  export quota  dwindled.  China  and  India  reduced  their  monthly  purchases  the  most,  slashing purchases  by  117.7k  tonnes  and  111.5k  tonnes  respectively.  Other  major  export  destinations  that  trimmed their purchases include Pakistan (-69.6k tonnes), the United States (-11.7k tonnes) and Bangladesh (-11.4k tonnes).  On  a  y-o-y  basis,  exports  dipped  25.3%  amid  lower  purchases  from  China  and  Pakistan.  The month’s decline brought YTD export growth to negative territory for the first time this year as Jan-July exports contracted 1.4% compared to a Jan-June growth of 3.9%.

Inventory jumps to nearly 2m tonnes. Inventory rose for the first time in five months amid rising production and weaker exports. The month’s inventory shot up to 1.999m tonnes, up 17.6% m-o-m and 0.1% y-o-y. CPO inventory rose 21.3% m-o-m while refined palm oil stockpiles increased 14.5%, indicating a tough operating environment for both CPO producers and refiners.


Source: OSK

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