MARKET DEVELOPMENT
Plantations Sector To Remain Bullish Albeit Decelerating Production Growth
Plantations Sector To Remain Bullish Albeit Decelerating Production Growth
12/07/2013 (Borneo Post) - Malaysia’s palm oil industry is expected to remain bullish despite decelerating production growth and depleting inventory level, as the demand-supply imbalance is expected to further support the recovery of crude palm oil (CPO) prices.
According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), Malaysian Palm Oil Board (MPOB) had reported in its latest inventory data that stocks level in June 2013 had declined by nine per cent month-on-month (m-o-m) to 1.65 million metric tonnes.
Anaylst Alan Lim of Kenanga Research said, “We gather the inventory level is now the lowest in 27-months since March 2011.”
He added that total demand (exports and domestic disappearance) of 1.62 million metric tonne continues to exceed total supply (production and imports) of 1.45 million metric tonnes and this has caused stocks to deplete by another 0.17 million metric tonnes.
“Sabah’s CPO production surprisingly declined eight per cent m-o-m as compared to seven per cent increase each in Peninsular Malaysia and Sarawak most probably due to tree stress effect after enjoying strong production in the fourth quarter of 2012 (4Q12) and 1Q13,” Lim highlighted.
On a global front, the analyst explained exports fell flat m-o-m at 1.41 million metric tonnes as higher exports to China (an increase of 16 per cent m-o-m to 271,000 metric tonnes) and European Union (an increase of 33 per cent to 202,000 metric tonnes) was neutralised by lower exports to India (a drop of 38 per cent m-o-m to 134,000 metric tonnes) and US (a drop of 15 per cent to 90,000 metric tonnes).
“Better palm oil demand from China and EU is likely to emerge due to warmer weather in June against May. As for India, lower demand may be caused by the ending of stock up activity pre-Ramadhan. In the US, soybean oil is favoured in view of declining prices in June,” Lim opined.
Additionally, he viewed, “We believe July-13 total demand of 1.61 million metric tonnes should continue to stay ahead of total supply of 1.57 million metric tonnes, hence depleting inventory by another 0.04 million metric tonnes.
“We think total demand should stay strong at a level similar to June. Despite normalising demand from India and Pakistan post-Ramadhan stock up activities, potential increase in demand from China due to its warmer weather which may neutralise the impact. Hence, we have assumed flat exports m-o-m for July.
“On the supply side, we have assumed eight per cent increase m-o-m in production in line with seasonal trend. Although Intertek data show exports for first 10 days of July declined by 16 per cent m-o-m, we believe outlook for full month remain positive as demand should return in second half of the month.
“Overall, we expect CPO prices to continue its uptrend at least in the short term.”
Concurring the view on rising CPO prices, analyst from MIDF Investment Bank Bhd (MIDF Research) in a separate note said for the three months ahead, CPO prices is expected to be buoyed on stronger demand due to price attractiveness compared with other edible oils and escalating price of crude oil.
The analyst explained since June 2012 the discount has widened to an average of US$280 per metric tonne which is six times higher than its 15-year average.
“At the current huge discount of CPO against soybean oil, buyer is expected to demand more CPO. This will provide support to CPO price and gradually narrowing the discount gap between CPO and soybean oil,” she said.
In addition, the analyst highlighted there is also the factor of strong correlation between CPO price and crude oil price (an increase of 79 per cent from 1998 to July 2013).
She further noted that in 2007, crude oil price started to soar as the production of biodiesel became economically viable, which lead to the correlation pattern between CPO price and crude oil price to change significantly.
“In addition, with good government subsidies and incentives, the production and consumption of biodiesel in US and Europe in particular continue to increase,” she said.
The analyst further noted, “MIDF Research expects WTI crude oil to average US$96.5 per barrel in 2013. This is a 2.5 per cent increase from 2012’s average of US$94.15 per barrel. Any improvement in commodity prices will boost the recovery of CPO prices.”
Meanwhile, analyst Lim cautioned of the oncoming La Nina as weather as it could cause a supply shock in 2H13 if it happens during tree stress period.
While The Australian Bureau of Meteorology is of view that the possibility of La Nina is now less prominent as ‘climate models suggest neutral El Nino/La Nina–Southern Oscillation (ENSO) pattern will persist into austral sping, the possibility of La Nina in 2013 cannot be totally ruled out, Lim advised.
He added, CPO production in Malaysia could decline by up to 15 per cent below normal level should La Nina materialise as excessive rains will impact fresh fruit bunches (FFB) harvesting process. Hence, CPO prices could surge significantly if La Nina occurs.
On a whole, Lim said the research firm viewed the latest inventory data as mildly positive and we expect CPO prices to recover in the near term. MIDF Research retained its more positive outlook on the sector as it expects attractive CPO price due to wide discount against soy oil and low CPO export tax rate compared to Indonesia, as well as the increase in biodiesel production particularly in US and Europe.
According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), Malaysian Palm Oil Board (MPOB) had reported in its latest inventory data that stocks level in June 2013 had declined by nine per cent month-on-month (m-o-m) to 1.65 million metric tonnes.
Anaylst Alan Lim of Kenanga Research said, “We gather the inventory level is now the lowest in 27-months since March 2011.”
He added that total demand (exports and domestic disappearance) of 1.62 million metric tonne continues to exceed total supply (production and imports) of 1.45 million metric tonnes and this has caused stocks to deplete by another 0.17 million metric tonnes.
“Sabah’s CPO production surprisingly declined eight per cent m-o-m as compared to seven per cent increase each in Peninsular Malaysia and Sarawak most probably due to tree stress effect after enjoying strong production in the fourth quarter of 2012 (4Q12) and 1Q13,” Lim highlighted.
On a global front, the analyst explained exports fell flat m-o-m at 1.41 million metric tonnes as higher exports to China (an increase of 16 per cent m-o-m to 271,000 metric tonnes) and European Union (an increase of 33 per cent to 202,000 metric tonnes) was neutralised by lower exports to India (a drop of 38 per cent m-o-m to 134,000 metric tonnes) and US (a drop of 15 per cent to 90,000 metric tonnes).
“Better palm oil demand from China and EU is likely to emerge due to warmer weather in June against May. As for India, lower demand may be caused by the ending of stock up activity pre-Ramadhan. In the US, soybean oil is favoured in view of declining prices in June,” Lim opined.
Additionally, he viewed, “We believe July-13 total demand of 1.61 million metric tonnes should continue to stay ahead of total supply of 1.57 million metric tonnes, hence depleting inventory by another 0.04 million metric tonnes.
“We think total demand should stay strong at a level similar to June. Despite normalising demand from India and Pakistan post-Ramadhan stock up activities, potential increase in demand from China due to its warmer weather which may neutralise the impact. Hence, we have assumed flat exports m-o-m for July.
“On the supply side, we have assumed eight per cent increase m-o-m in production in line with seasonal trend. Although Intertek data show exports for first 10 days of July declined by 16 per cent m-o-m, we believe outlook for full month remain positive as demand should return in second half of the month.
“Overall, we expect CPO prices to continue its uptrend at least in the short term.”
Concurring the view on rising CPO prices, analyst from MIDF Investment Bank Bhd (MIDF Research) in a separate note said for the three months ahead, CPO prices is expected to be buoyed on stronger demand due to price attractiveness compared with other edible oils and escalating price of crude oil.
The analyst explained since June 2012 the discount has widened to an average of US$280 per metric tonne which is six times higher than its 15-year average.
“At the current huge discount of CPO against soybean oil, buyer is expected to demand more CPO. This will provide support to CPO price and gradually narrowing the discount gap between CPO and soybean oil,” she said.
In addition, the analyst highlighted there is also the factor of strong correlation between CPO price and crude oil price (an increase of 79 per cent from 1998 to July 2013).
She further noted that in 2007, crude oil price started to soar as the production of biodiesel became economically viable, which lead to the correlation pattern between CPO price and crude oil price to change significantly.
“In addition, with good government subsidies and incentives, the production and consumption of biodiesel in US and Europe in particular continue to increase,” she said.
The analyst further noted, “MIDF Research expects WTI crude oil to average US$96.5 per barrel in 2013. This is a 2.5 per cent increase from 2012’s average of US$94.15 per barrel. Any improvement in commodity prices will boost the recovery of CPO prices.”
Meanwhile, analyst Lim cautioned of the oncoming La Nina as weather as it could cause a supply shock in 2H13 if it happens during tree stress period.
While The Australian Bureau of Meteorology is of view that the possibility of La Nina is now less prominent as ‘climate models suggest neutral El Nino/La Nina–Southern Oscillation (ENSO) pattern will persist into austral sping, the possibility of La Nina in 2013 cannot be totally ruled out, Lim advised.
He added, CPO production in Malaysia could decline by up to 15 per cent below normal level should La Nina materialise as excessive rains will impact fresh fruit bunches (FFB) harvesting process. Hence, CPO prices could surge significantly if La Nina occurs.
On a whole, Lim said the research firm viewed the latest inventory data as mildly positive and we expect CPO prices to recover in the near term. MIDF Research retained its more positive outlook on the sector as it expects attractive CPO price due to wide discount against soy oil and low CPO export tax rate compared to Indonesia, as well as the increase in biodiesel production particularly in US and Europe.