07/08/2012 (Borneo Post) - Crude palm oil (CPO) prices are expected to suffer short term pressure as the Malaysian Palm Oil Board (MPOB) July 2012 CPO stocks report are estimated to swell beyond the two million metric tonne (mt) range.

“We have assumed that CPO exports will tumble by 14 per cent month-on-month (m-o-m) to 1.32 million mt while production will grow strongly by 12 per cent m-o-m to 1.65 million mt in July,” said the research arm of Kenanga Investment Bank Bhd (Kenanga Research) in its research report yesterday.

It recapped that 2011 supernormal profit for planters was achieved at a margin of approximately RM2,200 per mt of CPO.

As the cost per mt of CPO was expected to surge by RM200 to RM1,200-RM1,300 per mt of CPO, Kenanga Research estimated that CPO prices would need reach another new high of RM3,300 in 2012 for most planters just to maintain their same earnings achieved in 2011.

“Such a scenario is unlikely in our view and hence there will be comparatively less exciting earnings to be reported for financial year 2012,” the research house pointed out.

Potential weak second quarter results, limited CPO prices upside and a weakening El Nino underpinned Kenanga Research’s decision to downgrade the sector.

The latest Southern Oscillation Index reading of +0.9 suggested that a strong El Nino event was unlikely at the current juncture. As a weak El Nino was expected to come between September to December this year.

“Although there is a strong possibility for El Nino to return, we believe tha the chances now are significantly lower as the SOI reading has recovered sharply from -10.4 in end-June to the positive level within a month’s time,” said Kenanga Research.

Malaysia’s CPO production declined nine per cent year-on-year (y-o-y) to 7.81 million mt due to the tree stress effect as well as lag effect from the El Nino in 2010.

“The tree stress condition turned out to be worse than expected with the first half of 2012 CPO production coming in at seven per cent below our estimate of 8.31 million mt.

“As a result, we have adjusted down the fresh fruit bunch (FFB) yield for all planters under or coverage by six to eight per cent,” the report added.

Together with its lower CPO price assumptions, Kenanga Research cut its financial year 2012/2013 expected earnings by three to 21 per cent for the planters under its coverage.

Kenanga Research noted that it preferred young planters and that its top picks were TSH Resources Bhd (TSH) and United Malacca Bhd (UMCCA).

“The average age profile for TSH and UMCCA at 6.2 and 7.6 years old respectively are the youngest among the planters under our coverage.

“Due to the huge amount of plantation land coming into maturity, we expect the double digit FFB growth for TSH and UMCCA to be sustained,” explained Kenanga Resesarch. Meanwhile, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) expected CPO output to show sequential rise this month and next month in line with its historical production trend.

Data analysis from 1980 to 2011 showed CPO production in the two months normally rose by 8.87 per cent month-on-month and 9.57 per cent month-on-month, respectively.

“As for demand, we expect India to import more CPO from Malaysia, pursuant to its latest action to double import duty on refined products in order to stimulate its local refining industry,” it said in a research note.

CPO export is expected to rebound in August and September as the government has recently increased the duty-free CPO export quota from 3.5 million metric tonnes to 5.6 million metric tonnes, MIDF said.

For next year, the research firm expected the average CPO price to ease by 3.2 per cent to RM3,050 per metric tonne from its current year estimate, in tandem with the expected subdued price performance of other commodities.