Malaysia’s palm oil stockpile  rose  marginally to 1.985m tonnes in Dec 2013  –  likely  to be  the seasonal peak. In the months ahead, inventory will ease,  providing a lift  for  palm oil prices.  A stronger price  catalyst, however,  is  in  the  form  of  Pertamina’s  upcoming  second  biodiesel tender.  Maintain  OVERWEIGHT,  with  First  Resources,  Bumitama  and AALI as sector Top Picks. Malaysian Top Picks are IOI and SOP.

• No surprises. Malaysia’s palm oil inventory ended at 1.985m tonnes  for 2013,  sharply  lower  vis-à-vis  end-2012,  as  export  growth  outstripped production growth and local consumption surged during the year. Prices  softened.  Palm oil prices have retraced in the past  two  weeks,as  Indonesia’s  mandatory  biodiesel  programme  encountered  hiccups, due to pricing issues. Pertamina only managed to secure 18% of the 3m tonnes  of  biodiesel  supply  required.  The  18%  secured  is  sufficient  for two months’ consumption. There is an upcoming second tender, which is said to be on 21 Jan.
• Production  weakness  more  apparent  in  2Q.  We  believe  palm  oil prices  will  strengthen  progressively  throughout  2014  due  to  lacklustre production in Indonesia,  as a result of rainfall deficit  over  the past  two years.  We  believe  more  price  strength  will  be  seen  in  the  2Q,  as production weakness becomes more apparent. W eak 1Q production is likely to be perceived as seasonal in nature.
• India’s import tax.  India raised its import duty for refined edible oil from 7.5% to 10.0% but tax for crude edible oil is unchanged, the impact of which is neutral it will only cause a switch from refined to crude products.
• Buying  opportunity.  We  view  the  price  pullback  as  temporary  and provides  a  buying  opportunity.  The  main  stumbling  block  for  palm  oil prices  to  charge  higher  at  this  point  in  time  is  the  relatively  narrow discount to  soybean  oil  at  USD65  per  tonne.  On  the  flipside,  this  also means  there  is  a  USD65  upside  for  palm  oil  price  before  it  comes  to parity  against  soybean  oil  price.  As  we  have  seen  in  2009  and  2010, poor palm oil production led to parity price against soyoil.

How 2013 played out

• Production trend
• Production yield
• Export trend
• Local consumption
• Inventory
• Downstream performance
• Average price
• Price spread

Malaysia’s 2013 palm oil production hit its highest level ever at 19.215m tonnes, an increase of 429,800  tonnes,  or 2.3%,  from 2012. West Malaysia produced 10.328m tonnes (+0.1% y-o-y),  making up 53.8% of total production. Sabah production rose 4.2% to 5.776m tonnes, or 30.1% of the country’s production, while Sarawak’s output rose by 6.4% to 3.110m tonnes, or 16.2% of national production.

Within  West  Malaysia,  the  three  biggest  producing  states,  ie  Johor,  Pahang  and Perak,  make  up  76%  of  Peninsula  Malaysia’s  production.  Surprisingly,  only  three states, ie Johor, Pahang and Kelantan, showed production increases, while the other seven experienced production declines of between 1.7-12.9%.

Malaysia’s  oil  yield  was  marginally  better  at  3.85  tonnes  per  ha  compared  to  3.84 tonnes in 2012. Sabah remained as the highest yielding state at 4.40 tonnes (4.29 tonnes in 2012).

2013 total palm oil export rose by 3.2% to 18.122m tonnes, also a record high but only marginally surpassing  2011’s  17.982m tonnes  level. China remained the largest export destination with total shipment of 3.700m tonnes,  or 20.4% of total exports, followed  by Europe (12.9% of total), India (12.8%  of total), Pakistan (7.9%  of total) and the US (5.6% of total). Encouragingly, shipments to China rose by 5.6%, Europe was up by 4.9% and Pakistan by 6.3%. However, shipment to India dipped by 11.9% on loss of market share to Indonesia and the US slipped by 1.7%.

Malaysia’s  local  consumption  rose  by  12.1%  y-o-y  to  2.291m  tonnes,  driven  by biodiesel consumption. However, local consumption is still significantly off peak of the 2.591m tonnes achieved in 2008.

End-2013’s  1.985m  palm  oil  inventory  was  sharply  lower  than  what  it  was  at  end-2012,  thanks  to  trade  normalisation  following  the change in  Malaysia’s  export  duty structure for  CPO  and poor production growth in Indonesia. Compared to  the  trough level of 1.648m tonnes in  June 2013, it was up by 20.5%. We view inventory level as being comfortable and should not cause oversupply concerns.

The  abovementioned  trade  normalisation  has  helped  the  Malaysian  downstream business remain competitive against  its  Indonesian counterparts. Malaysia’s refinery utilisation rate improved to 69.7% in 2013 compared to 63.0% in 2012. Oleochemical plant utilisation also improved to 77.4% compared to 75.9% a year earlier.

Palm oil prices averaged MYR2,375 per tonne, based on the simple average of West Malaysia MPOB price, or about 1% lower than our MYR2,400 per tonne expectation. On a weighted average basis, based on 43.7% production in the 1H and 56.3% in the 2H, average palm oil price was slightly higher at MYR2,380. Discount  to  soybean  oil  widened  last  year  to  an  average  of  USD209  per  tonne  in 2013 compared to the USD208 discount in 2012. However, in the 4Q alone, average discount was at USD100 per tonne,  with the discount reducing to under USD100 in Nov 2013  onwards due to  the  relative ampleness of soybean supply relative to palm oil.

Compared to  Brent  Crude, palm oil traded at an average of USD4.08 discount per barrel in 2013, compared to an average premium of USD18.89 per barrel in 2012. The  discount  to  Brent  Crude  encouraged  the  use  of  biodiesel,  which  helped  pare down palm oil inventory in 2013.

Source: RHB