- Newsflow in the plantation sector this week were in respect of the increase in exports of Malaysian palm oil in the first 15 days of June, soybean glut in China and the continued narrowing of prices between CPO in Malaysia and Indonesia.

- According to independent cargo surveyors, exports of Malaysia palm oil expanded 16% to 18% in the first 15 days of June compared with the same period in May. The improvement in exports was driven by higher demand from Pakistan and Bangladesh. SGS reported that Pakistan bought 1694.2% more palm oil in 1 to 15 June 2013 compared with the same period in May. Demand from China was flat.

- Although it is still too early to conclude if exports in June would be better than May, we reckon that the strength in demand was supported by the upcoming festive period and discount between soybean oil and CPO. Based on the latest prices, soybean oil is about 27.4% more expensive than CPO versus the five-year average of 18.1%. Although soybean prices have been declining, soybean oil prices have been inching up.

- In another development, Bloomberg reported that soybean imports by China may be lower than USDA’s (US Department of Agriculture) forecast. Inbound shipments could be 63mil tonnes for the period ending 30 Sept versus USDA’s forecast of 69mil tonnes.

- Although there is a glut of soybean in China, palm oil inventory at the ports in the country have been edging down. Palm oil inventory at the major ports fell 60,000 tonnes from the previous week to 1.32mil tonnes for the week ending 7 June 2013.

- Finally based on the latest auctions, the difference between CPO prices in Malaysia and Indonesia is about RM230/tonne to RM300/tonne. This is positive for upstream players in Indonesia as the price differential used to be as large as RM600/tonne to RM700/tonne a few years ago.

- Going forward, the price differential is expected to shrink further on the back of an increase in refining capacity in Indonesia. From an industry player, we understand that competition for CPO between the refiners in the country is intensifying.

- Indonesia’s palm refining capacity is estimated to increase from 25.1mil tonnes this year to 30.9mil tonnes in 2014F. Indonesia’s CPO production is forecast between 27mil tonnes to 28mil tonnes in 2013F.

- We remain positive on the plantation sector as slowing production and improved demand are expected to support CPO prices. We have BUYs on Genting Plantations, IJM Plantations, TSH Resources and KL Kepong.

Source: AmeSecurities