12/05/2012 (Borneo Post) - A worse than expected biological stress on oil palm trees has caused a production decline in crude palm oil (CPO), keeping prices aloft as worldwide demand for the commodity generally remains resilient as ever.

Adding to the lucrative price trend was the current planting preference in the US for corn as soybean was losing acreage to the former, potentially giving less costly substitute CPO a supply advantage in global markets for the time being.

According to Kenanga Investment Bank Bhd (Kenanga Investment) analyst Alan Lim, Malaysia’s CPO inventory level for April 2012 was reported at 1.85 million metric tonnes (mmt), coming in at the lower range of the consensus estimate of 1.82mmt to 1.92mmt.

“It was also three per cent below our estimate of 1.9mmt as the tree stress effect had caused a deeper than expected production decline.

“With the total demand increasing four per cent against the total supply drop of two per cent, the stocks-to-usage ratio declined to 10.3 per cent in April 2012 (from 11.2 per cent in March 2012).

“On the supply side, CPO production slumped 17 per cent year-on-year (y-o-y) to only 1.27mmt in April 2012. We believe that the data confirmed that the tree stress effect has intensified as the drop of 17 per cent y-o-y in April 2012 was worse than the y-o-y decline of 15 per cent in March 2012.

“We believe that there is still long way to go before the tree stress effect ends. In the past 10 years, the worst CPO production down-cycle due to tree stress lasted for more than two years.

“As this round of tree stress is only two months old, we believe that it will be some time before one can see a significant increase in production again,” he opined.

On the demand side, CPO export was flat in April 2012 at 1.33mmt as demand growth from the major CPO consumers was neutralised by lower demand from other smaller CPO consumers such as Egypt and Bangladesh.

Among the key CPO consumers, the highest growth came from India, up 104 per cent month-on-month (m-o-m) to 245,000 mt, Europe (up 18 per cent m-o-m to 204,000 mt) and China (up six per cent m-o-m to 274,000 mt).

The strengthening CPO exports to India were probably caused by a shift of demand towards cheaper CPO instead of soybean oil, which had appreciated significantly. European demand for palm oil might have increased due to higher usage of it as a cheaper feedstock for biodiesel after winter ended.

The increase in exports to China might reflect continuous aggressive buying from the country to hedge against potentially worse-than-expected droughts in South America, Lim stated.

With regards to soybean, he said, “It appears that chances are now slimmer for US soybean to exceed the low planting intention of 73.9 million acres. We understand that plantings for most crops in US have intensified due to the good weather.

“Spring plantings had a very good start with corn as the key beneficiary. Corn sowings until April 29 was 53 per cent completed over the intended area (significantly higher than last year’s 12 per cent and the 5-year average of 27 per cent).

“The rapid planting progress should result in very large corn plantings, and hence less acreage for soybean. In order to cover the lower soybean oil supply, CPO demand will have to increase given its use as a soybean oil substitute, and hence offering more upside for CPO prices ahead,” he rationalised.

Lim stated that the fundamentals were leaning towards bullish CPO prices, which in turn continued to support Kenanga Investment’s positive outlook on the plantation sector.

As such, he maintained the investment house’s 2012 average CPO price forecast of RM3,200 per mt while pointing out that there was an upside bias if the tree stress effect worsened.