Palm oil price held on to its gains yesterday despite record-high inventory in Malaysia, suggesting that the past month’s price weakness already factors in the sharp rise in inventory. The worst may be over, with palm oil production starting on a seasonal downcycle, which should ease the high stockpile. The substitution effect arising from US’ soybean supply shortfall will also kick in. We maintain OVERWEIGHT on the sector as the recent price weakness provides a buying opportunity. We note that 4Q tends to be the best quarter for both palm oil price and plantation stocks.
Is the worst over? Things are looking up, with the price of palm oil holding steady despite Malaysia’s inventory hitting a record high of 2.48m tonnes. Palm oil price is now almost on par with crude oil, which rarely happens, suggesting that the recent slide was excessive. There could still be downside surprises from the unwinding of soybean’s speculative long positions, which are still on the high side. Although soybean supply continues to remain tight as the three biggest-producing countries saw two consecutive
disappointing seasons, the soybean price could still weaken due to a long liquidation. Having said that, we believe the substitution of this commodity will take place.
Government action to propel price. We are hopeful that the recent price weakness will prompt the Indonesian and Malaysian governments to step up cooperation to implement a price stabilization mechanism. This has been discussed for many years although with little progress, as palm oil price has been strong. We believe any joint attempt to stabilize prices will be effective as the palm oil industry is essentially a duopoly between Malaysia and Indonesia, which in combination account for about 90% of global palm oil.
Structural uptrend. We continue to believe that the palm oil price will strengthen over time as Indonesia’s production growth decelerates starting in 2013 and plateau in 2015 or 2016. The current price weakness should be seen as a buying opportunity. We continue to like companies with young trees, like First Resources, Sarawak Oil Palms and BW Plantations, as they stand to benefit from stronger future prices. We also like Kulim, which will become a near-pure plantation stock post-disposal of its fast food business.
Is the worst over? Things are looking up, with the price of palm oil holding steady despite Malaysia’s inventory hitting a record high of 2.48m tonnes. Palm oil price is now almost on par with crude oil, which rarely happens, suggesting that the recent slide was excessive. There could still be downside surprises from the unwinding of soybean’s speculative long positions, which are still on the high side. Although soybean supply continues to remain tight as the three biggest-producing countries saw two consecutive
disappointing seasons, the soybean price could still weaken due to a long liquidation. Having said that, we believe the substitution of this commodity will take place.
Government action to propel price. We are hopeful that the recent price weakness will prompt the Indonesian and Malaysian governments to step up cooperation to implement a price stabilization mechanism. This has been discussed for many years although with little progress, as palm oil price has been strong. We believe any joint attempt to stabilize prices will be effective as the palm oil industry is essentially a duopoly between Malaysia and Indonesia, which in combination account for about 90% of global palm oil.
Structural uptrend. We continue to believe that the palm oil price will strengthen over time as Indonesia’s production growth decelerates starting in 2013 and plateau in 2015 or 2016. The current price weakness should be seen as a buying opportunity. We continue to like companies with young trees, like First Resources, Sarawak Oil Palms and BW Plantations, as they stand to benefit from stronger future prices. We also like Kulim, which will become a near-pure plantation stock post-disposal of its fast food business.
MPOB STATISTICS FOR SEPTEMBER 2012
Production surges. Malaysia’s palm oil production in September 2012 was at 2.004m tonnes, surging 20.4% or 339.9k tonnes from August as Sabah’s production finally recovered after a lacklustre 8M2012. All regions saw double-digit m-o-m gains, with Peninsular Malaysia, Sabah and Sarawak seeing output rise by 19.9%, 25.2% and 14.4% m-o-m respectively. Production was also higher y-o-y for the first time in seven months, rising by 7.2% after Sabah’s y-o-y monthly production growth turned positive for the first time since Feb 2012. YTD production was still down 5.1% compared to the same period in 2011, but is an improvement from 8M2012’s 7.0% y-o-y decline.
Exports rise at a tepid pace. 1.506m tonnes of palm oil were shipped overseas in Sept, 4.5% or 64.7k tonnes higher than in August. China and India increased monthly purchases by 56.1k and 42.1k tonnes, while Pakistan and the United States trimmed buying by 46.7k and 27.9k tonnes. Despite the m-o-m rise, exports remained weaker on a y-o-y basis, falling by 2.6% as China and Pakistan reduced purchases by 75.6k and 63.7k tonnes respectively. YTD exports totalled 12.467m tonnes, 3.2% lower compared to Jan-Aug last year.
Inventory swells to 2.5m tonnes. With production growth outpacing that of exports, inventory swelled by 368.2k tonnes to 2.481m tonnes, higher by 17.4% m-o-m and 16.3% y-o-y. CPO stockpiles surged 34.9% m-o-m after a 24.9% rise the previous month. Refined palm oil inventory, meanwhile, continued its downward trend following a 5.1% m-o-m drop in September after a 11.9% decline in the previous month.
Production surges. Malaysia’s palm oil production in September 2012 was at 2.004m tonnes, surging 20.4% or 339.9k tonnes from August as Sabah’s production finally recovered after a lacklustre 8M2012. All regions saw double-digit m-o-m gains, with Peninsular Malaysia, Sabah and Sarawak seeing output rise by 19.9%, 25.2% and 14.4% m-o-m respectively. Production was also higher y-o-y for the first time in seven months, rising by 7.2% after Sabah’s y-o-y monthly production growth turned positive for the first time since Feb 2012. YTD production was still down 5.1% compared to the same period in 2011, but is an improvement from 8M2012’s 7.0% y-o-y decline.
Exports rise at a tepid pace. 1.506m tonnes of palm oil were shipped overseas in Sept, 4.5% or 64.7k tonnes higher than in August. China and India increased monthly purchases by 56.1k and 42.1k tonnes, while Pakistan and the United States trimmed buying by 46.7k and 27.9k tonnes. Despite the m-o-m rise, exports remained weaker on a y-o-y basis, falling by 2.6% as China and Pakistan reduced purchases by 75.6k and 63.7k tonnes respectively. YTD exports totalled 12.467m tonnes, 3.2% lower compared to Jan-Aug last year.
Inventory swells to 2.5m tonnes. With production growth outpacing that of exports, inventory swelled by 368.2k tonnes to 2.481m tonnes, higher by 17.4% m-o-m and 16.3% y-o-y. CPO stockpiles surged 34.9% m-o-m after a 24.9% rise the previous month. Refined palm oil inventory, meanwhile, continued its downward trend following a 5.1% m-o-m drop in September after a 11.9% decline in the previous month.
Source: OSK
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