Journey to Wealth
Regional Plantation - Palm Oil Carves Out Bottom
We are maintaining our Overweight call on the sector. We believe the inventory build-up is temporary in nature as the substitution effect from poor US soybean output could kick in as early as next month when US harvesting season begins. Concerns of El Nino will also be renewed as the Southern Oscillation Index (SOI) falls to negative territory. Our CPO price assumption remains at RM3,000 per tonne this year, which will remain intact even if CPO price continues to linger atcurrent levels with YTD price being close to RM3,200 per tonne. We expect CPO price to average RM3,500 per tonne in CY13.
Temporary weakness in export. We believe the slowdown in shipment to China (-117.7k tonnes and India (-111.5k tonnes) is temporary. India's slowdown in purchase last month should not be surprising after the torrid pace in the first six months. After this slowdown, its import should pick up steam again, especially with the potentially poor crop output this year. China's import of palm oil, meanwhile, could pick up due to the newly imposed price control on cooking oil, as palm oil is a much cheaper raw material compared to the alternatives.
Soybean's strength to rub off on palm oil. Palm oil has been languishing despite soybean's price strength. It takes time for soybean supply shortfall to translate into demand for palm oil. Due to palm oil's short shelf life, buyers will not stock up
significantly ahead of time to meet the shortfall. The substitution effect will take place when the market starts to be dependent on US soybean supply from the upcoming harvest. USDA now expects US soybean production to come in at 2.69bn bushels, down from 3.05bn bushels it expects last month. This reduction of 9.8m tonnes of soybean will translate into a further reduction of 1.8m tonnes of soybean oil supply, which if substituted with palm oil will nearly exhaust Malaysia's palm oil inventory.
Renewed concerns on El Nino. The SOI is now back in negative territory, which will renew concerns on El Nino. The US Climate Prediction Centre indicated that El Nino conditions are likely to develop in August or September. This, plus India's below average rainfall, should provide good support for palm oil price at current levels.
MPOB STATISTICS FOR JULY 2012
Production recovers. Malaysia's July 2012 palm oil production stood at 1.692m tonnes, 15.0% or 221.3k tonnes higher compared to June, as production maintains its seasonal upward trajectory. Peninsular Malaysia and Sarawak production rose 17.4% and 17.8% m-o-m respectively, while Sabah production increased by a much tamer 8.0%. Y-o-y monthly production contraction narrowed significantly from 16.1% to 3.4% as Peninsular Malaysia and Sarawak production recorded their first y-o-y increases since February 2012. Production in the peninsular rose 2.9% y-o-y, with Sarawak output increasing by an even stronger 9.5%. Sabah production continues to disappoint, dropping by 20.1% y-o-y. YTD production summed up to 9.507m tonnes, 8.1% below that of the same period in 2011.
Exports plunge. Exports declined by 234.7k tonnes, or 15.3%, from June to 1.297m in July as the year's tax-free CPO export quota dwindled. China and India reduced their monthly purchases the most, slashing purchases by 117.7k tonnes and 111.5k tonnes respectively. Other major export destinations that trimmed their purchases include Pakistan (-69.6k tonnes), the United States (-11.7k tonnes) and Bangladesh (-11.4k tonnes). On a y-o-y basis, exports dipped 25.3% amid lower purchases from China and Pakistan. The month's decline brought YTD export growth to negative territory for the first time this year as Jan-July exports contracted 1.4% compared to a Jan-June growth of 3.9%.
Inventory jumps to nearly 2m tonnes. Inventory rose for the first time in five months amid rising production and weaker exports. The month's inventory shot up to 1.999m tonnes, up 17.6% m-o-m and 0.1% y-o-y. CPO inventory rose 21.3% m-o-m while refined palm oil stockpiles increased 14.5%, indicating a tough operating environment for both CPO producers and refiners.
Source: OSK
Temporary weakness in export. We believe the slowdown in shipment to China (-117.7k tonnes and India (-111.5k tonnes) is temporary. India's slowdown in purchase last month should not be surprising after the torrid pace in the first six months. After this slowdown, its import should pick up steam again, especially with the potentially poor crop output this year. China's import of palm oil, meanwhile, could pick up due to the newly imposed price control on cooking oil, as palm oil is a much cheaper raw material compared to the alternatives.
Soybean's strength to rub off on palm oil. Palm oil has been languishing despite soybean's price strength. It takes time for soybean supply shortfall to translate into demand for palm oil. Due to palm oil's short shelf life, buyers will not stock up
significantly ahead of time to meet the shortfall. The substitution effect will take place when the market starts to be dependent on US soybean supply from the upcoming harvest. USDA now expects US soybean production to come in at 2.69bn bushels, down from 3.05bn bushels it expects last month. This reduction of 9.8m tonnes of soybean will translate into a further reduction of 1.8m tonnes of soybean oil supply, which if substituted with palm oil will nearly exhaust Malaysia's palm oil inventory.
Renewed concerns on El Nino. The SOI is now back in negative territory, which will renew concerns on El Nino. The US Climate Prediction Centre indicated that El Nino conditions are likely to develop in August or September. This, plus India's below average rainfall, should provide good support for palm oil price at current levels.
MPOB STATISTICS FOR JULY 2012
Production recovers. Malaysia's July 2012 palm oil production stood at 1.692m tonnes, 15.0% or 221.3k tonnes higher compared to June, as production maintains its seasonal upward trajectory. Peninsular Malaysia and Sarawak production rose 17.4% and 17.8% m-o-m respectively, while Sabah production increased by a much tamer 8.0%. Y-o-y monthly production contraction narrowed significantly from 16.1% to 3.4% as Peninsular Malaysia and Sarawak production recorded their first y-o-y increases since February 2012. Production in the peninsular rose 2.9% y-o-y, with Sarawak output increasing by an even stronger 9.5%. Sabah production continues to disappoint, dropping by 20.1% y-o-y. YTD production summed up to 9.507m tonnes, 8.1% below that of the same period in 2011.
Exports plunge. Exports declined by 234.7k tonnes, or 15.3%, from June to 1.297m in July as the year's tax-free CPO export quota dwindled. China and India reduced their monthly purchases the most, slashing purchases by 117.7k tonnes and 111.5k tonnes respectively. Other major export destinations that trimmed their purchases include Pakistan (-69.6k tonnes), the United States (-11.7k tonnes) and Bangladesh (-11.4k tonnes). On a y-o-y basis, exports dipped 25.3% amid lower purchases from China and Pakistan. The month's decline brought YTD export growth to negative territory for the first time this year as Jan-July exports contracted 1.4% compared to a Jan-June growth of 3.9%.
Inventory jumps to nearly 2m tonnes. Inventory rose for the first time in five months amid rising production and weaker exports. The month's inventory shot up to 1.999m tonnes, up 17.6% m-o-m and 0.1% y-o-y. CPO inventory rose 21.3% m-o-m while refined palm oil stockpiles increased 14.5%, indicating a tough operating environment for both CPO producers and refiners.
Source: OSK
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