We  expect  palm  oil  prices  to  start  swinging  up  once  evidence  of disappointing  production  levels  become  evident  this  quarter  as  the impact  of  2013’s  dryness  sets  in.  The  current  rise  in  inventory  is unlikely to  be  sustained,  especially when exports  pick up. Indonesia’s biodiesel tender should  also help keep palm oil prices  to  stay resilient. Maintain OVERWEIGHT on the sector.

• Production  climbed  further.  Malaysia’s  palm  oil  production  climbed further,  albeit at sharply slower rate of 3.9%  m-o-m  vis-à-vis the  17.1% m-o-m  jump  in  March.  This  proves  us  wrong  in  expecting  April’s production  to  normalise  downwards,  but  does  prove  that  March production was unusually strong due to the spillover from February.  
• Inventory  also  rose.  Despite  the  slower  rate  of  production  climb, inventory rose at a faster pace of 4.6% m -o-m vs 1.7% in March. This was  due  to  the  still  sluggish  exports  of  1.26m  tonnes  and  a  surge  in imports  to  43,100  tonnes.  Local  consumption  rose  to  260,700  tonnes, helping to mitigate the sluggish exports.
• Production outlook. We expect the current rise in inventory to be short lived,  as  the  12-month  impact  of  the  2013  drought  in  Sumatra  should soon kick in if it has not already done so. First Resources (FR SP, BUY, FV: SGD2.86) expects its 2Q production to be flattish vis-à-vis 1Q due to this. Meanwhile, Wilmar International (WIL SP, NR) expects a slow climb in production during the current seasonal upcycle and expects relatively soft production up to August. It also expects  its peak crop this year to be relatively small.
• Soybean to  limit  palm  oil’s advance.  With soybean supply proving to be  healthy,  and  stock  to  usage  ratio  normal  at  27%,  there  has  been continuous  long  liquidation  of  soybean.  This  could  temporarily  limit CPO’s price rise. However,  we expect palm oil to be resilient  on:  i)  the upcoming supply crunch resulting in  a discount to soybean oil narrowing further,  ii)  Pertamina’s  third tender at end-May to soak up another 0.6-0.8m kilolitres of palm oil,  and  iii)  the Southern Oscillation Index  again plunging, ie a higher likelihood of drought-causing El Nino. 

Source: RHB