13/10/2011 (Borneo Post) - Crude palm oil (CPO) demand is forecasted to decline if the current global economic growth slows down in the fourth quarter of 2011 (4Q11).

A research note by the research arm of Kenanga Investment Bank Bhd (Kenanga Research) showed that export figures dropped further in September, down nine per cent m-o-m to 1.54 million metric tonnes (mmt) from three per cent decrease m-o-m in August.

The second consecutive drop m-o-m after five consecutive months of m-o-m increase signaled that global economy slowdown had significantly affected CPO demand.

Kenanga Research opined, “We reckon that the trend of weakening CPO demand will continue in the 4Q11. In addition, palm oil demand for bio-fuel in Europe usually wanes in winter as it freezes below 24 degrees Celsius.”

The research house expected production to increase in 4Q11 after strong jump of 12 per cent in September to 1.87 mmt. This was within its expectation as fresh fruit bunch (FFB) harvesting process had been affected in August (down five per cent m-o-m to 1.67mmt) due to the fasting month.

Kenanga Research opined, “We think production should continue to improve and eventually peak in October or November as palm oil trees recover from biological stress in the past two years.

The research house forecasted inventories to climb higher in 4Q11 after strong rebound of 12 per cent m-o-m to 2.12 mmt in September. Oversupply situation had prevailed in September as total supply grew by two per cent m-o-m while total demand declined eight per cent m-o-m.

Accordingly, inventory stock-usage ratio surged 1.8 percentage points m-o-m from 8.5 per cent to 10.3 per cent and crude palm oil (CPO) prices fell two per cent m-o-m to RM3,062.

The report further stated, “In anticipation of better palm oil production and weaker exports, we reckon CPO price will further weaken in the medium term, barring any unforeseen dramatic weather changes.

“We expect the oversupply condition to continue for at least two more months as CPO production should decline in December.

“Currently, we expect average CPO prices of RM3,000 (down nine per cent y-o-y) in 2012 but may revise it downwards further if soybean oil prices stay below US$0.50 per pound for an extended period.

“We reiterate our view CPO demand may drop significantly if global economic growth slows down in 4Q11,” the report underlined.