Palm  oil  price  held  on  to  its  gains  yesterday  despite  record-high  inventory  in Malaysia, suggesting that the past month's price weakness already factors in the sharp rise in inventory. The worst may be over, with palm oil production starting on a seasonal downcycle, which should ease the high stockpile. The substitution effect  arising  from  US'  soybean  supply  shortfall  will  also  kick  in.  We  maintain OVERWEIGHT  on  the  sector  as  the  recent  price  weakness  provides  a  buying opportunity. We note that 4Q tends to be the best quarter for both palm oil price and plantation stocks.  

Is  the  worst  over?  Things  are  looking  up,  with  the  price  of  palm  oil  holding  steady despite Malaysia's inventory hitting a record high of 2.48m tonnes. Palm oil price is now almost on par with crude oil, which rarely happens, suggesting that the recent  slide was excessive.  There could still be downside surprises from the unwinding of soybean's speculative  long  positions,  which  are  still  on  the  high  side.  Although  soybean  supply continues to remain tight as the three biggest-producing countries saw two consecutive
disappointing  seasons,  the  soybean  price  could  still  weaken  due  to  a  long  liquidation. Having said that, we believe the substitution of this commodity will take place.
 
Government action to propel price. We are hopeful that the recent price weakness will prompt the Indonesian and Malaysian governments to step up cooperation to implement a price stabilization mechanism. This has been discussed for many years  although with little  progress,  as  palm  oil  price  has  been  strong.  We  believe  any  joint  attempt  to stabilize prices will be effective as the palm oil industry is essentially a duopoly between Malaysia and Indonesia, which in combination account for about 90% of global palm oil.
 
Structural  uptrend. We continue to believe  that the  palm oil price  will  strengthen  over time as Indonesia's production growth decelerates starting in 2013 and plateau in 2015 or  2016.  The  current  price  weakness  should  be  seen  as  a  buying  opportunity.  We continue  to  like  companies  with  young  trees,  like  First  Resources,  Sarawak  Oil  Palms and  BW  Plantations,  as  they  stand  to  benefit  from  stronger  future  prices. We  also  like Kulim,  which  will  become  a  near-pure  plantation  stock  post-disposal  of  its  fast  food business.

MPOB STATISTICS FOR SEPTEMBER 2012 
 
Production surges. Malaysia's palm oil production in September 2012 was at 2.004m tonnes, surging 20.4% or 339.9k tonnes from August as Sabah's production finally recovered after a lacklustre 8M2012. All regions saw  double-digit  m-o-m  gains,  with  Peninsular  Malaysia,  Sabah  and  Sarawak  seeing  output  rise  by  19.9%, 25.2%  and  14.4%  m-o-m  respectively.  Production  was  also  higher  y-o-y  for  the  first  time  in  seven  months, rising by 7.2% after Sabah's y-o-y monthly production growth turned positive for the first time since Feb 2012. YTD  production  was  still  down  5.1%  compared  to  the  same  period  in  2011,  but  is  an  improvement  from 8M2012's 7.0% y-o-y decline.

Exports  rise  at  a  tepid  pace.  1.506m  tonnes  of  palm  oil  were  shipped  overseas  in  Sept,  4.5%  or  64.7k tonnes higher than in August. China and India increased monthly purchases by 56.1k and 42.1k tonnes, while Pakistan and the United States trimmed buying by 46.7k and 27.9k tonnes. Despite the m-o-m rise, exports remained weaker on a y-o-y  basis, falling by 2.6% as China and Pakistan reduced purchases by 75.6k and 63.7k tonnes respectively. YTD exports totalled 12.467m tonnes, 3.2% lower compared to Jan-Aug last year.

Inventory  swells  to  2.5m  tonnes.  With  production  growth  outpacing  that  of  exports,  inventory  swelled  by 368.2k tonnes to 2.481m tonnes, higher by 17.4% m-o-m and 16.3% y-o-y. CPO stockpiles surged 34.9% m-o-m  after  a  24.9%  rise  the  previous  month.  Refined  palm  oil  inventory,  meanwhile,  continued  its  downward trend following a 5.1% m-o-m drop in September after a 11.9% decline in the previous month.

Source: OSK