Expects Jan-2013 inventory to decline 2% MoM to 2.57m mt. We are revising our Jan-13 inventory forecast to 2.57m mt (from 2.66m mt) as we believe exports may have been better than expected at a 7% decline as compared to our earlier estimate of a 11% decline. On the supply side, we gather that the production decline may have been higher at a 13% decline (as compared to our estimate of a 11% decline). Note that the actual MPOB data will be released on 13-Feb. Although we believe the overall data will be positive on CPO prices, the upside should still be limited in view of the still high inventory level at way above 2.0m mt.

CPO demand picked up in the last week  of January as soybean oil increased in tandem with the dry weather in Argentina. Cargo surveyor data showed that palm oil exports recovered from a 15% decline MoM in  the first 25 days of January to just a 7% decline for the full month of January, indicating that palm oil demand had likely improved towards the end of January. On the overall, we now expect higher Jan-13 exports at 1.53m mt (from 1.48m mt) as the improved soybean oil price towards end-January may have prompted more demand substitution into palm oil given the attractive discount of the latter against soybean oil at about US$300/mt. We understand that Argentina's weather has been too dry in end-January (which prompted the higher soybean oil price) but there is still time for the rain to arrive and limit the damage on soybean plantings there.

Palm oil production may decline 13% MoM but will still be 20% higher YoY. We have reduced our CPO production estimate to 1.55m mt (from 1.58m mt) as the higher-thanexpected rainfall in January may have affected the FFB harvesting process. However, we believe the production figure is still high considering that it is still 20% higher YoY against Jan-2012's palm oil production of 1.29m mt. In the short term, the high production should keep the inventory level above 2.0m mt throughout 1QCY2013.

Major earnings disappointment soon.  In the coming Feb-2013 earnings season, we believe that the earnings results will generally trail their consensus estimates. MPOB has announced recently that the average CPO price in 2012 was at RM2764/mt. This is below both the consensus and our estimates of RM3000/mt and RM2900/mt respectively. We believe that the lower price was caused by the extremely low CPO price achieved in 4QCY12 at RM2170/mt in line with the record-high inventory in the sector. Hence, we believe that most plantation companies' share prices will remain under pressure in the near term.

Source: Kenanga