Expect  CPO ASP recovery in 1Q13. MPOB’s  Nov 2012 palm oil stockpile was another record high at 2.56m MT, which came in between street and our estimates of 2.5m MT and 2.6m MT respectively. Exports were weaker, in tandem with lower CPO production. We believe  the stockpile will recede from  December  onwards to allow a gradual recovery in CPO price. Nonetheless, we remain Neutral on the sector on a 12M view as valuations are fair. The plantation index has retreated 4% YTD amidst CPO  price  having fallen 35% YTD. Our regional top BUYs are Sime Darby, Sarawak Oil Palms and First Resources.

Another record Malaysian stockpile. Malaysia’s palm oil stockpile hit another record high of 2.56m MT at end-Nov 2012 (+2% MoM, +24% YoY) – comprising record CPO stocks of 1.66m MT (+6% MoM, +34% YoY) and processed palm oil stocks of 0.9m MT (-5% MoM, +5% YoY) – see Fig 7. CPO production was marginally lower at 1.89m MT in Nov 2012 (-3% MoM, +16% YoY) as Sabah hit peak production relatively later than the rest of Malaysia  in 2012. The lower production corresponded with a 4% MoM decline in exports to 1.66m MT (+1% YoY). The key surprise in Nov 2012 was the huge jump in domestic consumption of 0.26m MT (+21% MoM, +222% YoY) – see Fig 2.

Malaysian refiners regaining competitiveness.  Nov 2012 exports show further pick-up in demand for Malaysia’s processed palm oil (i.e. refined palm products) which is a positive sign, confirming that Malaysian refiners are regaining competitiveness  vis-à-vis Indonesian refiners by ramping up production. Since Sept 2012, Malaysian-based refiners have benefited from a MYR100/t “discounted” CPO ASP from the millers (especially in Sabah and Sarawak). Come 1 Jan 2013, we believe the landscape will remain favourable for Malaysian-based refiners as  the country’s new CPO export duty will result in cheaper input cost for the refiners thereby allowing them to compete with their Indonesian peers on a more level playing field.

Expect flattish Dec 2012 exports. Initial estimates of Malaysia’s Dec 1-10 palm  oil exports by Intertek (ITS) and Societe Generale de Surveillance (SGS)  indicate relatively flattish  exports at 0.50m MT  (- 2.8% MoM) and 0.52m MT (+0.4% MoM) respectively. Our preliminary estimates suggest that Malaysia’s  December stockpiles could  ease slightly to 2.47m MT (-3.5% MoM).

Expect CPO price to recover. CPO price has stayed weak throughout 4Q12 thus far with  spot  ASP  at MYR2,224/t due to  ample palm oil stocks in Malaysia (and Indonesia). Hence,  we expect the  wide price discounts of CPO to soyoil (3M futures on 7 Dec 2012: USD387/t) and rapeseed oil (USD443/t)  to narrow in the coming months once Malaysia’s  palm oil  stockpile  eases off. We maintain our  MYR2,950/t CPO ASP for 2012 (YTD: MYR2,984/t) and MYR3,000/t for 2013.

Source: Maybank Research - 11 Dec 2012