MARKET DEVELOPMENT
‘Current Palm Oil Production Weakness More Than Just Floods’
‘Current Palm Oil Production Weakness More Than Just Floods’
03/01/2015 (Borneo Post) - Current weakness in the production of palm oil may not necessarily have been caused solely by the floods in West Malaysia, say analysts, as it is seen to have very short-term impact on palm oil production.
Analysts Alvin Tai and Hoe Lee Leng from RHB Research Institute Sdn Bhd (RHB Research) noted that the delayed impact of dryness in the first quarter of 2014 (1Q14) could have contributed to the relative weakness in West Malaysia’s production versus that in East Malaysia.
They added that floods typically have a very short term impact on production.
“Once the waters subside, production normalises rather quickly. Nevertheless, there will be some crop loss in the interim as floods make harvesting difficult, if not impossible,” they said in a note to investors yesterday.
“Oil extraction rate will also suffer due to loss of loose fruits. Also, there are issues with crop evacuation.”
Malaysian Palm Oil Association’s (MPOA) interim production numbers suggest that December 2014 production will decline by 20 per cent month on month which, coupled with a single-digit decline in shipment, will result in inventory reduction.
“We suspect the current production weakness could be due to more than just floods,” they added. “The extreme dryness experienced in 1Q14 could have played a part, which was why the production decline in Dec 2014 was significantly worse in West Malaysia.
“In any case, the last time Malaysia was hit by such flooding was possibly in 2006,” it added.
Meanwhile, Public Investment Bank Bhd (PublicInvest Research) said this weakness in production would likely drag on for the next one or two months.
“The worst flood along the East Coast due to the monsoon season has affected fresh fruit bunch (FFB) harvesting and milling activities as well as logistics and transportation,” it highlighted in a separate note.
“The flood situation in Kelantan, Terengganu, Pahang, Perak and Johor, which collectively account for 40.8 per cent of Malaysian oil palm plantation, has improved yesterday.
“These five states also contribute about 44 per cent of total CPO production in Malaysia. We think that it could at least take one to two months for production to normalise.”
On crude palm oil (CPO) prices, which saw a slight recovery since the incident, PublicInvest Research said it was likely to recover further driven by the lower CPO inventories for December. “It has recovered more than 7.5 per cent since early-December. We think that it could easily stand above RM2,400 per metric tonne in the short-term.”
RHB Research believes the current palm oil price upswing will continue into January but noted that upside is probably limited due to the weakness in crude oil price reducing non-mandatory biodiesel usage.
“Indonesia’s mandatory biodiesel usage could also be reduced, as it is driven by economic feasibility and not carbon emission reduction.
“We exited the year with palm oil prices averaging RM2,413 per tonne, which was in line with our average price assumption of RM2,400.
“We expect prices to average RM2,500 in 2015, with most of the upside taking place only in the second half (2H).
“At this point in time, we believe there is a downside risk of some RM150 per tonne to our average 2015 price assumption.”
Analysts Alvin Tai and Hoe Lee Leng from RHB Research Institute Sdn Bhd (RHB Research) noted that the delayed impact of dryness in the first quarter of 2014 (1Q14) could have contributed to the relative weakness in West Malaysia’s production versus that in East Malaysia.
They added that floods typically have a very short term impact on production.
“Once the waters subside, production normalises rather quickly. Nevertheless, there will be some crop loss in the interim as floods make harvesting difficult, if not impossible,” they said in a note to investors yesterday.
“Oil extraction rate will also suffer due to loss of loose fruits. Also, there are issues with crop evacuation.”
Malaysian Palm Oil Association’s (MPOA) interim production numbers suggest that December 2014 production will decline by 20 per cent month on month which, coupled with a single-digit decline in shipment, will result in inventory reduction.
“We suspect the current production weakness could be due to more than just floods,” they added. “The extreme dryness experienced in 1Q14 could have played a part, which was why the production decline in Dec 2014 was significantly worse in West Malaysia.
“In any case, the last time Malaysia was hit by such flooding was possibly in 2006,” it added.
Meanwhile, Public Investment Bank Bhd (PublicInvest Research) said this weakness in production would likely drag on for the next one or two months.
“The worst flood along the East Coast due to the monsoon season has affected fresh fruit bunch (FFB) harvesting and milling activities as well as logistics and transportation,” it highlighted in a separate note.
“The flood situation in Kelantan, Terengganu, Pahang, Perak and Johor, which collectively account for 40.8 per cent of Malaysian oil palm plantation, has improved yesterday.
“These five states also contribute about 44 per cent of total CPO production in Malaysia. We think that it could at least take one to two months for production to normalise.”
On crude palm oil (CPO) prices, which saw a slight recovery since the incident, PublicInvest Research said it was likely to recover further driven by the lower CPO inventories for December. “It has recovered more than 7.5 per cent since early-December. We think that it could easily stand above RM2,400 per metric tonne in the short-term.”
RHB Research believes the current palm oil price upswing will continue into January but noted that upside is probably limited due to the weakness in crude oil price reducing non-mandatory biodiesel usage.
“Indonesia’s mandatory biodiesel usage could also be reduced, as it is driven by economic feasibility and not carbon emission reduction.
“We exited the year with palm oil prices averaging RM2,413 per tonne, which was in line with our average price assumption of RM2,400.
“We expect prices to average RM2,500 in 2015, with most of the upside taking place only in the second half (2H).
“At this point in time, we believe there is a downside risk of some RM150 per tonne to our average 2015 price assumption.”