Sabah palm oil surprise


CPO price by CIMB

Malaysia’s end-November palm oil stocks rose 2.3% month-on-month and 22% year-on-year to a record high of 2.56 million tonnes. Exports were weaker than expected and production from Sabah surprised on the upside.

Regional investment player, CIMB Investment Bank produced a research report where it downgraded its regional call for the plantation sector from a Trading Buy to Neutral as it is less bullish on crude palm oil (CPO) price prospects following the unexpected retreat of the El Nino weather risks.

Also factoring into its Neutral call is that palm oil stockpile has turned out higher than expectations due to weaker demand and stronger seasonal supply. The investment bank expects this to keep CPO price lower for a longer period.

Data shows that the average CPO price for November fell 1.3% versus the month before (or “month-on-month” in analyst lingo)to RM2,214 per tonne due to concerns over high palm oil stockpiles and weaker soybean prices. Average CPO prices for the 11 months of this year declined by 13.8% to RM2,844 per tonne versus the average RM3,298 per tonne for the first 11 months of 2011 (“year-on-year”).

The report notes that this is in line with its recently revised average CPO price forecast of RM2,820 per tonne for 2012. It is maintaining its average CPO price forecasts of RM2,840 for 2013 and RM3,000 for 2014.

In light of market conditions, it sees better prospects for Singapore-listed companies, adding:

“Following our recent CPO price review and taking into account the potential impact of the minimum wage increase in Indonesia, we are switching our preference towards the Singapore-listed players as they offer higher share liquidity and will be less affected by the CPO price decline than the pure planters due to their exposure to the branded cooking oil business. We have also turned positive on Wilmar as we expect it to benefit from the higher sales volumes for palm oil and better refining margins. Singapore planters remain an Overweight. We maintain our Neutral stance on Malaysian and Indonesian planters.”

The report notes that the investment bank’s expectation of a peak in stocks in October appears too optimistic given the strong production from Sabah and weaker-than-expected exports. “We think that stocks may have peaked in November and will start declining by 1% to 2.54 million tonnes at end-Dec 12 as the seasonal decline in production outweighs demand.”

The investment bank’s report also highlights demand supply factors.

Strong Sabah output in November

CPO output fell 2.6% month-on-month in November as the 6.5% month-on-month drop in production from Peninsular Malaysia more than offset the 2% year-on-year (2011 versus 2012) rise in output from East Malaysia.

What surprised the investment bank most was the slower-than-usual mom decline in fresh fruit bunch (FFB) yield during November, due mainly to the stronger-than-expected FFB yield achieved by the estates in Sabah. As a result, FFB output from Sabah rose 6% in November month-on-month and 21% over the output for 2011.

FFB yield for the country improved 1.5% month-on-month and 18% year-on-year in November due mainly to strong yields in Sabah. However, the country’s oil extraction rate (OER) was 2% lower yoy at 20.18%, mainly due to the weaker extraction rate achieved by the oil palm mills.

CPO output fell 2.4% year-on-year to 17 million tonnes in the first 11 months on 2012, largely because of weak production in 2Q12. It says this decline was broadly in line with its forecast.

Demand from China insufficient to pick up slack

The investment bank also highlights exports falling 6% month-on-month and were flat year-on-year at 1.66 million tonnes as the sharp pick-up in demand from China, Pakistan and the US was not sufficient to offset weaker demand from India, the EU and other export markets.


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