06/11/2012 (Borneo Post) - The upcoming palm oil inventory data for October, to be released by the Malaysian Palm Oil Board (MPOB) on November 12, has been forecast to climb up seven per cent month-on-month (m-o-m) to a new record high at 2.65 million metric tonnes (mmt) from 2.48mmt in September.

Alan Lim, an analyst from the research division of Kenanga Investment Bank Bhd (Kenanga Research) noted this yesterday, adding that “the high inventory should already been reflected in current very high discount of CPO against soybean oil at more than US$250 per mt.”

“M-o-m, exports should grow 10 per cent to 1.66mmt from a low base as the huge discount of CPO against soybean oil should have attracted more demands.

“However, against an expected much higher CPO production of 1.92mmt, the exports growth of 10 per cent will still not be enough to reduce the inventory in October.

“The high CPO production is in line with the seasonal factor, with MPOB data showing that CPO production peaked in October in the past three years.”

When asked about the seasonal production down cycle, he told The Borneo post that output “then declines m-o-m continuously until February which is the trough production in the past three years.”

“Despite the expected rise, we do not think that the price will return to 2012 high of RM3,568 per mt anytime soon. Overall, the high inventory should keep the CPO price upside limited in the near term,” he said.

Lim pointed out that CPO was trading at a very high discount against soybean oil with an average of US$370 per mt in October, more than double the five-year average discount of US$158 per mt. As such he expected this to drive demand from soybean oil towards palm oil.

The analyst observed that China’s Purchasing Managers Index (PMI) climbed to 50.2 in October (against 49.8 in September), possibly signaling that its economy had improved after two rounds of interest rate cut in June and July this year.

Meanwhile in the US, the Institute for Supply Management (ISM) manufacturing index had improved slightly to 51.7 in October (against 51.5 in September).

“We expect CPO demand to increase in tandem with the better economy outlook in these countries. Hence, the CPO price should increase gradually from its current level of RM2,300 to RM2,400 once the high inventory level is cleared,” Lim opined.

When asked about CPP demand from India – a leading consumer of edible oils – he told The Borneo Post that there were ‘no positive indicators’ as yet.

“However, we believe that the stocking up ahead of Deepavali should keep the demand from India at decent growth although it should almost come to the end,” he said, noting that Deepavali was just one week away on November 13.

The analyst maintained Kenanga Research’s 2012 and 2013 average CPO price of RM2,975 to RM3,000, which was below the consensus average of RM3,050 to RM3,025.

He was bullish on ‘young planters’ like TSH Resources Bhd (TSH) and United Malacca Bhd (UMCCA) which boasted average tree age profiles of just 6.2 and 7.6 years old respectively, the youngest among pure planters under the research house’s coverage.

“Due to the double-digit FFB (fresh fruit bunch) growth prospects for TSH and UMCCA, we expect their earnings to be more resilient than other planters,” he said while revealing target prices of RM2.70 per share and RM7.65 per share respectively.