Beyond a very short-term weakness caused by rising inventory, we believe the price of palm oil will go on a multi-year uptrend, caused by Indonesia’s production growth deceleration starting next year and plateauing in 2016. This will continue to put a lid on the stock/usage ratio for the eight major oils, which is at its lowest level in five years. We are convinced that soybean’s supply shortfall will lead to its substitution by palm oil, a trend that will gain pace as the US soybean harvesting season progresses. Maintain OVERWEIGHT.
The going gets worse. According to Oil World, the US soybean crop has deteriorated further due to the late arrival of rain as well as damage caused by Hurricane Isaac. The US soybean crop is expected to decline by 10.7 tonnes to 73.3m tonnes in the Sept 2012–Aug 2013 period, which will be the smallest harvest since the 2007/2008 period and the third-lowest crop yield in 13 years. US soybean reserve is now at a 4-decade low.
Soybean oil spread continues to widen. Even though it took a while, soybean oil price is starting to gain relative strength against soybean and soymeal due to the stock/usage ratio falling to its lowest levels in 5 years. Meanwhile, the spread between palm oil and soybean oil has widened to USD332 per tonne. We believe the shortfall of edible oils will soon translate into greater demand for palm oil.
The going gets worse. According to Oil World, the US soybean crop has deteriorated further due to the late arrival of rain as well as damage caused by Hurricane Isaac. The US soybean crop is expected to decline by 10.7 tonnes to 73.3m tonnes in the Sept 2012–Aug 2013 period, which will be the smallest harvest since the 2007/2008 period and the third-lowest crop yield in 13 years. US soybean reserve is now at a 4-decade low.
Soybean oil spread continues to widen. Even though it took a while, soybean oil price is starting to gain relative strength against soybean and soymeal due to the stock/usage ratio falling to its lowest levels in 5 years. Meanwhile, the spread between palm oil and soybean oil has widened to USD332 per tonne. We believe the shortfall of edible oils will soon translate into greater demand for palm oil.
Inventory to decline soon. Palm oil inventory will begin to decline soon, driven by two key factors: i) a seasonal downtrend in palm oil production, which should hit its seasonal peak either in September or October and will soften in the next four to five months; ii) the substitution effect arising from soybean oil’s shortage. This will gradually pick up as the US soybean harvesting season progresses from September to November.
Fundamentals point to long-term price uptrend. In the longer term and beyond the current poor US soybean season, we doubt that the stock/usage ratio would have much room to rise. Indonesia’s palm oil production will start to decelerate next year before reaching a plateau in 2016. Given the fact that palm oil is the world’s single biggest edible oil and going by the Indonesia’s production growth pattern, a flattening in Indonesia’s production will result in much a stronger palm oil price over time.
Fundamentals point to long-term price uptrend. In the longer term and beyond the current poor US soybean season, we doubt that the stock/usage ratio would have much room to rise. Indonesia’s palm oil production will start to decelerate next year before reaching a plateau in 2016. Given the fact that palm oil is the world’s single biggest edible oil and going by the Indonesia’s production growth pattern, a flattening in Indonesia’s production will result in much a stronger palm oil price over time.
MPOB STATISTICS FOR AUGUST 2012
Production marginally weaker during fasting month. Malaysia produced 1.663m tonnes of palm oil in Aug 2012, 1.7% or 29.2k tonnes lower compared to July as labour supply tightened during the Ramadan fasting month, but this was offset by a seasonal upward production trajectory. Sabah and Sarawak both saw production increase by 2.2% and 4.6% m-o-m respectively. Meanwhile, Peninsular Malaysia’s production, which constituted about 56.7% of the country’s production in August, fell 5.1% m-o-m. The y-o-y monthly production contraction has narrowed significantly from a high of 20.6% in May to just 0.3% last month, indicating that production has recovered substantially y-o-y. Peninsular Malaysia and Sarawak’s production rose 2.0% and 12.6% y-o-y while production from Sabah declined 10.7%. The total production of 11.170m tonnes YTD was still 7.0% below that in the same period in 2011.
Export recovers. Exports improved to 1.427m tonnes, 10.0% or 130.3k tonnes higher compared to July. July exports were previously hampered as the year’s tax-free CPO export quota dwindled. India, China and the US were the main contributors to the increase, raising their monthly purchases by 86.1k tonnes, 70.8k tonnes and 31.3k tonnes respectively. Pakistan (-36.0k tonnes), Bangladesh (-18.0k tonnes) and a general decline in European Union purchases (-38.5k tonnes) partly offset the increase. Nonetheless, exports remained weaker on a y-o-y basis, falling by 15.7% amid weak buying from China and Pakistan. With another month of double-digit percentage decline, YTD exports of 10.937m tonnes contracted by 3.5% y-o-y compared to the Jan-July decline of 1.4%.
Inventory swells to over 2m tonnes. Inventory rose for the second consecutive month despite stronger exports as August production still outpaced exports by 235.8k tonnes. The month’s inventory rose above the 2m-tonne mark for the third time this year to 2.115m tonnes, up 5.8% m-o-m and 12.1% y-o-y. CPO stockpiles surged 25.2% m-o-m while refined palm oil stockpiles were drawn down by about 11.9%. This may indicate a lack of CPO take-up by the Malaysian refiners amid a tough operating environment for the downstream players.
Production marginally weaker during fasting month. Malaysia produced 1.663m tonnes of palm oil in Aug 2012, 1.7% or 29.2k tonnes lower compared to July as labour supply tightened during the Ramadan fasting month, but this was offset by a seasonal upward production trajectory. Sabah and Sarawak both saw production increase by 2.2% and 4.6% m-o-m respectively. Meanwhile, Peninsular Malaysia’s production, which constituted about 56.7% of the country’s production in August, fell 5.1% m-o-m. The y-o-y monthly production contraction has narrowed significantly from a high of 20.6% in May to just 0.3% last month, indicating that production has recovered substantially y-o-y. Peninsular Malaysia and Sarawak’s production rose 2.0% and 12.6% y-o-y while production from Sabah declined 10.7%. The total production of 11.170m tonnes YTD was still 7.0% below that in the same period in 2011.
Export recovers. Exports improved to 1.427m tonnes, 10.0% or 130.3k tonnes higher compared to July. July exports were previously hampered as the year’s tax-free CPO export quota dwindled. India, China and the US were the main contributors to the increase, raising their monthly purchases by 86.1k tonnes, 70.8k tonnes and 31.3k tonnes respectively. Pakistan (-36.0k tonnes), Bangladesh (-18.0k tonnes) and a general decline in European Union purchases (-38.5k tonnes) partly offset the increase. Nonetheless, exports remained weaker on a y-o-y basis, falling by 15.7% amid weak buying from China and Pakistan. With another month of double-digit percentage decline, YTD exports of 10.937m tonnes contracted by 3.5% y-o-y compared to the Jan-July decline of 1.4%.
Inventory swells to over 2m tonnes. Inventory rose for the second consecutive month despite stronger exports as August production still outpaced exports by 235.8k tonnes. The month’s inventory rose above the 2m-tonne mark for the third time this year to 2.115m tonnes, up 5.8% m-o-m and 12.1% y-o-y. CPO stockpiles surged 25.2% m-o-m while refined palm oil stockpiles were drawn down by about 11.9%. This may indicate a lack of CPO take-up by the Malaysian refiners amid a tough operating environment for the downstream players.
Source: OSK
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