04/10/2012 (Borneo Post) - The plantation sector is to see an unexciting fourth quarter of 2012 (4Q12) as September crude palm oil (CPO) inventory levels are expected to reach an all-time high of 2.43 million metric tonnes (MT).

“We believe that September 2012 CPO inventory could increase 15 per cent month-on-month to 2.43 million MT as we expected the CPO production of 1.83 million MT to continue exceeding exports volume of 1.46 million MT,” the research arm of Kenanga Investment Bank Bhd (Kenanga Research) stated in its research report.

The research house noted that in August, stocks were reported at 2.12 million MT or at the higher end of the consensus’ estimate of 2.09 million to 2.14 million MT.

“The strong CPO production of 1.66 million MT outpaced the export volume of 1.43 million MT, causing inventories to inch 0.12 million MT higher to 2.12 million MT,” the report added.

Kenanga Research expected this trend to continue through the 4Q12, keeping inventory levels above two million MT, denoting an ample supply of CPO in the marking.

As such, CPO price upside should be limited.

The 3Q12 earnings were expected to improve quarter-on-quarter (q-o-q) driven by the expected significant jump in CPO production, which Kenanga Research believed should be more than enough to offset the lower CPO prices.

“A better production level in 1Q12 is expected due to the recovery from the tree stress effect as well as the seasonal trend factor,” the research house said.

It observed a weakening of CPO prices in the 3Q12 as a result of the surge in inventories above two million MT as export growth q-o-q failed to catch up with the significantly better production level.

Due to the high base effect of CPO prices and productions last year, Kenanga Research expected 3Q12 earnings to decline year-on-year (y-o-y).

The average spot CPO prices were expected to decline approximately six per cent to around RM2,900 per MT in the same period, in line with the lower soybean oil prices y-o-y, which had enjoyed high prices last year due to a severe shortage.

“CPO production should also decline by approximately two per cent y-o-y due to a tree stress effect after a strong production year as well as lag effect from El Nino which occurred two years ago,” the report noted.

Kenanga Research was also less concerned on an El Nino threat on production as the Southern Oscillation Index was at neutral levels of positive 2.4 as of September 23.