Plantation - Exports Slowing Down While Production Picking Up (Neutral)
Sector update

• As expected, Malaysia’s CPO production continued to pick up strongly in July, for the fifth consecutive month by 15% mom. Exports, however, fell by a similar amount of 15.3% mom. As a result, closing CPO stock levels rose 17.6% mom to 1.99m tonnes, resulting in annualised stock/usage ratio jumping up to 13.5% (from 9.9% in June).
• In the past few weeks, we have seen the drought in the US continuing to affect corn and soybean crops, leading to strong soybean product prices. However, this has not translated to a similar price trend for CPO, which we believe could be due to the weakening of El Nino indicators, as well as the rising CPO production levels in Malaysia and Indonesia as we head towards the peak production season. In addition, CPO exports from Malaysia are now down 1.3% yoy YTD, with the rate of yoy growth steadily slowing on a monthly basis, despite the gradually expanding price gap between the competing oils. We believe this could be due to the impact of the crisis in Europe affecting demand as well as the competitive impact of the Indonesian export tax system which makes Indonesian refined CPO cheaper. We therefore keep to our price forecasts, as we believe CPO prices would remain relatively lacklustre in the near term until and unless the weather turns for the worse and El Niño returns to haunt us. No change to our CPO price assumptions of RM3,100/tonne for CY2012, RM2,900/tonne for CY2013 and RM3,000/tonne for CY2014.
• We maintain our NEUTRAL call on the sector.

Source: RHB Research - 13 August 2012