THE BUZZ  

Malaysia's palm oil shipment for the first 20  days  of  October  2012  rose  by  16.7%  over the same period in September, according to cargo surveyor SGS. Shipment to India and China were weaker by 34.0% and 7.7% respectively but this was more than mitigated by
strength in shipment to the EU and other countries.

OUR TAKE  

Good  export  number.  We  view  the  increase  in  shipment  number  as  positive,  as  it represents significant m-o-m growth in light of the current pessimism on demand. Should the  16.7%  m-o-m growth be sustained for the whole month, Malaysia's shipment will reach  1.757m  tonnes  and  YTD  export  will  reach  14.214m  tonnes,  down  3.5%  against last year.

Insufficient  to  reduce  inventory.  In  the  worst  case  scenario,  assuming  a  5%  m-o-m increase in production to 2.104m tonnes, inventory will rise further to 2.698m tonnes.  In the  best  case  scenario  of  production  falling  by  5%  m-o-m,  inventory  will  still  rise  to 2.498m tonnes compared to 2.481m tonnes as at end-September.

Downside  limited  by  biodiesel  support.  We  doubt  that  crude  palm  oil  (CPO)  prices have  much  room  to  fall  given  that  it  is  already  trading  at  close  to  parity  with  crude  oil, which makes biodiesel viable. CPO typically trades at a premium of no less than USD10 per  barrel  and  in  the  past  year,  the  norm  has  been  within  the  USD20-USD40  range. However, the premium is now at only USD5.80 per barrel. Assuming a return to USD20 premium  per  barrel,  CPO  will  rise  by  RM317  per  tonne  from  here  while  a  return  to USD40 premium will see CPO price advancing by RM764 per tonne.

Maintain  Overweight.  The  industry  is  suffering  from 'indigestion' due to a surge in production  in  the  peak  season  and  restrictive  export  duty,  resulting  in  ballooning inventory. We believe the tax issue will be addressed with Malaysia's new export duty
effective Jan 2013 and the nationwide rollout of biodiesel. Prices could start to normalize ahead of the new year.

 Source: OSK