We  maintain  NEUTRAL  on  the  plantation  sector,  with  a  specific OVERWEIGHT on Singapore-listed firms on growth and valuations. With the high crop season already here, we believe the crude palm oil (CPO) price will remain low. We are optimistic of stronger prices next year, but investors seeking sector exposure should ideally buy towards Sept/Oct, as risks will be lower by then, when inventory hits its peak.  
 
- Peak  crop  season  coming  up.  We  believe  production  will  still  be healthy  in  2HCY13,  thereby  capping  the  upside  for  the  CPO  price.  The peak  production  months  will  come  in  September  or  October,  but  the high-crop  months could stretch  into  November  due  to  the  delayed peak of older trees in Sabah. Malaysia’s CPO production is likely to cross the 19m tonne level this year, up from 18.8m tonnes previously.   

- No price crash, unlike in 2012. Despite the healthy production, we do not  think  that  there  will  be  an  oversupply  situation  serious  enough  to cause  another  CPO  price  crash  this  year.  We  also  do  not  think  the factors that contributed to 2012’s price decline exist today. 

- Energy  price  supportive  of  CPO  price.  We  believe  energy  prices  will continue  to  be  supportive  of  the  palm  oil  price,  regardless  of  the  next phase of Malaysia’s mandatory biodiesel rollout. The palm oil price is still close to parity against Brent crude, which ensures that biodiesel exports will remain robust. 

- Demand growth. Demand from the two biggest edible oil consumers in the  world,  China  and India, continue to grow  this  year.  India’s edible oil imports grew by 12%, while its imports of palm oil (including olein) grew by 27% in the first six months. In China’s case, edible oil imports grew by 23%,  while  its  palm  oil  imports  grew  by  14%  in  the  first  five  months  of 2013.  Malaysia’s total palm oil exports  for  the  first  six  months  this  year grew by 7% to 8.4m tonnes. There are risks of slower demand growth in 2HCY13  given  the  arrival  of  South  American  soybean  in  destination markets. 

Source: RHB