14/08/2012 (Borneo Post) - Crude palm oil (CPO) exports tumbled 15 per cent month-on-month (m-o-m) in July 2012 to 1.3 million metric tonnes (MT) as demand growth lowered in key CPO consumer countries except Europe.

According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research) in its research report, “India saw the highest decline with minus 39 per cent m-o-m to 173,000 MT while China trailed behind with minus 37 per cent m-o-m to 198,000 MT and Pakistan with minus 35 per cent m-o-m to 128,000 MT.”

The research house explained that India and Pakistan might have finished their stocking activities ahead of Ramadhan in June 2012 and this might have led to the weaker export numbers the following month. On the other hand, exports to China normalised after its strong jump of 38 per cent in June to 316,000 MT.

Kenanga Research also believed that China might have slowed down its purchase in July after the strong surge in CPO prices earlier that month.

“The CPO inventory level of two million was a result of 15 per cent m-o-m production surge alongside tumbling exports of 15 per cent m-o-m. The stocks-to-usage ratio thereby jumped significantly to 11.3 per cent in July 12 from 8.4 per cent in June,” said Kenanga Research.

As such, higher output and tepid demand for CPO had pushed stocks-to-usage ratio above its three-year average level of 9.6 per cent. The research house thus believed that this would keep CPO prices upside limited in the near term.

Kenanga Research expected a weakening tree stress effect as CPO production showed ‘a meaningful recovery’ of 15 per cent m-o-m to 1.69 million MT in July 2012. This caused the year-on-year (y-o-y) decline to shrink to only three per cent as compared with June 11 which saw a 16 per cent decline y-o-y.

It predicted the tree stress effect to officially end in either September 2012 or fourth quarter of 2012 as the first y-o-y production increase would be seen.

Tracing history, Kenanga Research noted that the past 10 years had seen CPO production down cycle of four to 32 months as a result of tree stress. However, strong CPO production at 15 per cent m-o-m in July had prompted the research house to believe that the current round of tree stress impact would be a medium one lasting six to eight months.

“As the current tree stress impact has lasted five months, tree stress effect should end in the fourth quarter of 2012,” it added.

MIDF Amanah Investment Bank Bhd’s research arm, MIDF Research expected exports to regain its momentum, especially to India as a result of recent regulatory measures as well as possible stockpiling activities ahead of the coming Deepavali and Christmas celebrations. It maintained a neutral view on the plantation sector as it believed CPO prices would regain its RM3,000 to RM3,300 per MT levels towards the end of the year as output traditionally reaches its cyclical peak in the fourth quarter.

A protracted drought in North America also prompted the research house to expect supply of soybean oil to decline.

“Tighter supply of soybean ahs widened the palm oil discount vis-a-vis soybean to minus 22 per cent. This is hence supportive of the CPO prices going forward,” the research house stated in its ‘Palm Report’ yesterday.

On the El Nino effect, Kenanga Research pointed out that the Southern Oscillation Index (SOI) showed readings of plus 0.9 as of July 29, thereby suggesting that a strong El Nino event was unlikely.

RHB Research Institute Sdn Bhd concurred, noting that weak El Nino conditions were believed to be likely some time in the third quarter this year. As such, it believed that the impact on production and CPO prices was not likely to be severe.