We  see  a  silver  lining  in  Malaysian  Palm  Oil  Board  (MPOB)'s  stats  released yesterday.  Inventory  hit  a  record  2.56m  tonnes  but  production  weakened  amid  a seasonal  downcycle,  closely  followed  by  an  inventory  downcycle.  Local consumption  strengthened  even  after October's strong numbers, indicating that conversion  to  biodiesel  may  have  begun ahead  of  the  nationwide  rollout  in January.  We  are  revising  lower  our  CPO  price  assumptions  from  RM3,000 previously  to  an  indicative  RM2,870  for  CY12,  and  from  RM3,500  to  RM2,750  for CY13. Maintain OVERWEIGHT.   

Demand  holds  up  for  edible  oil.  China's edible oil imports jumped  27.1%  YTD  while India's imports climbed 21.6% for the first 10 months of the year. This indicated that edible  oil consumption  was  stable  despite  lingering  demand  concerns  due  to  the  weak global  economy.  However,  there  appeared  to  have  been  a  shift in  demand  to  soybean oil, perhaps due to anticipation of a soybean oil shortage. This led to palm oil trading at a more than USD430 discount to soybean oil.

Malaysia's palm oil consumption  surges.  Malaysia's local consumption surged to 256k tonnes in November from October's already strong 211k. We believe this may be been evidence that the Government is indeed rolling out the B5 biodiesel nationwide in January 2013, a move which is anticipated to consume  at least 0.5m tonnes of palm oil per annum.  

Inventory  downcycle.  Palm  oil  inventory  should  decline  from  here  on  as  it  historically trails production by a one to two months' lag. We are of the view that inventory would fall by some 0.4m'0.9m tonnes through May or June next year.

Maintain  OVERWEIGHT.  We  are  in  the  midst  of  reviewing  our  profit  forecasts  and target prices for individual stocks, with our CPO price assumptions trimmed to RM2,750 next year. This implies that prices should still recover from now on. We expect to lower CY13 profit forecast by between 7 ' 15%. The lower CPO price will be partly mitigated by  stronger  production  and  lower  windfall  tax  for  Malaysia  and  lower  export  duty  for Indonesian players. 

Production  in  seasonal  downcycle.  Malaysia's  palm  oil  production  contracted  to  1.888m  tonnes  in November,  down  2.6%  -  or  a  50.1k-tonne  decline  -  from  October  as  fresh  fruit  bunches  (FFB)  production entered a seasonal downcycle. Production from Peninsular Malaysia and Sarawak dipped 6.5% and 5.3% m-o-m  respectively,  while  Sabah  production  bucked  the  trend  with  a  6.2% gain.  On  a  y-o-y  basis,  production grew by double-digits for the first time since January 2012. November output climbed 16.0% y-o-y, bolstered by production from Sabah (+21.5% y-o-y) and Sarawak (+20.5% y-o-y). Nonetheless, YTD production slipped 2.4% over the same period in 2011 despite November's y-o-y rise following a lacklustre 1H2012.

Exports weaken. Malaysia exported 1.659m tonnes of palm oil in November, down 5.7%, or 99.7k tonnes m-o-m. China's monthlypurchases rose by nearly 500k tonnes (+234.9k tonnes to 499.9k tonnes), but the rise was  more  than  offset  by  lower  purchases  from  India  (-127.9k  tonnes),  the  European  Union  (-79.1k  tonnes) and Bangladesh (-42.7k tonnes). Meanwhile, exports ticked down by 0.3% y-o-y in November, making it the sixth  consecutive  month  of  y-o-y  decline,  with  the  stronger  purchases  from  China  offset  by  weaker  buying from  Pakistan  and  the  United  States.  YTD  exports  totalled  15.894m  tonnes,  3.1%  softer  compared  to  that from the Jan-Nov 2011 period. Shipment to India was up 52.8% while shipment to Europe was up by 15.9%. On  the  other  hand,  export  to  China  was  down  by  14.0%  and  Pakistan  bought  28.3%  less  palm  oil  from Malaysia.

Inventory  continues  to  climb.  Malaysia's palm oil inventory grew by 2.3% m-o-m  to  2.563m  tonnes  as production  declined less  than exports.  Refined  palm oil  inventory  eased  4.6% m-o-m  to  0.898m  tonnes, but CPO stockpiles rose 6.5% m-o-m to 1.665m tonnes. Total inventory was 23.8% higher y-o-y. This is the fourth consecutive month and the 11th time over the past 18 months that inventory had stayed above the 2m-tonne mark. Note that the increase in inventory this year has been in the form of CPO. From the start of the year, processed palm oil inventory was down by 92.8k tonnes while CPO inventory was up by 598.4k tonnes hence Malaysia's lower export duty for CPO starting Jan 2013 is crucial in halting the CPO inventory build-up.

 Source: OSK