17/11/2012 (Borneo Post) - Malaysia’s crude palm oil (CPO) inventory level has been hitting record highs of late but is anticipated to see a seasonal decline in the months ahead and spur the recovery of the commodity’s price as stock to usage ratios moderate.

The inventory level for October reached another record high of 2.51 million metric tonnes (mmt) but came in lower than the consensus estimate of 2.68mmt.

The better performance was caused by the higher than expected exports growth of 16 per cent on a month-on-month (m-o-m) basis, which beat the consensus expectations of 10 per cent.

Low CPO prices throughout October at the average of RM2243.50 per mt (down 18 per cent m-o-m) and its high discount of US$370 per mt against soybean oil could have spurred the exports growth, leading palm oil to regain more market shares from soybean oil, according to Alan Lim, an analyst from the research arm of Kenanga Investment Bank Bhd (Kenanga Research).

“We believe the stock level could have peaked in October and we expect it to decline to 2.45mmt in November.

“CPO production should decline eight per cent m-o-m in November, consistent with its historical seasonal production pattern. We also think exports should continue to grow at five per cent m-o-m due to support by the persistent discount gap against soybean oil,” Lim said.

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

Meanwhile, vice president of research of Alliance Research Sdn Bhd (Alliance Research) Arhnue Tan noted that production continued to be strong amid peak production cycle while exports lagged behind.

“While this is negative for CPO prices, we see inventories tapering off from November onwards as production tapers off.

“Coupled with some m-o-m improvements in exports due to year end festive season demand and also buyers capitalising on the attractive prices of CPO, we expect CPO prices staging a mild recovery in the coming weeks.”

She expected to see inventory levels tapering down from November onwards as the peak production cycle tapered off and CPO price to trend above RM2,500 per mt in the coming weeks but any increases would likely be capped at RM2,800 per mt because of softer year-on-year (y-o-y) demand.

Alvin Tai of OSK Research Sdn Bhd (OSK Research) opined that while inventory might peak only this month or in December, signs of inventory flattening should trigger a recovery in palm oil price.

“We continue to believe a structural price up-cycle will occur next year, albeit from a lower base. This will be propelled by a deceleration in Indonesia’s production, coupled with sustained global consumption growth.

“Despite concerns of demand weakness, China and India have continued to snap up edible oil. As China’s imports of edible oil surged 25.8 per cent through October, 2012 is poised to be the first year since 2007 that China has raised its edible oil imports, which have been steadily declining since 2008.

“Purchases from India have been strong too this year, rising by 22.4 per cent through September. Even crisis-plagued Europe has raised imports by 14.5 per cent, judging from Malaysia’s shipment numbers,” the analyst pointed out.