KUALA LUMPUR: Unexpectedly strong demand for palm oil has helped prices stay afloat amid increasing supply. The Malaysian Palm Oil Board (MPOB) which released the October data showed a 2.1% increase in crude palm oil (CPO) production.
Inventory levels fell 1.55% to 2.1 million tonnes from September but remained significantly higher than the five-year average of 1.7 million tonnes.
Kenanga Investment Bank Bhd research analyst Alan Lim told The Edge Financial Daily that inventory levels were still very close to the all-time high of 2.27 million tonnes in November 2008. “The stock to usage ratio decrease to 8.8% from 10.5% in September this year has supported CPO prices recently,” he noted.
Demand has been mostly external with exports increasing by 19.04% month-on-month (m-o-m).
Lim said this was largely driven by exports to Pakistan (+80% m-o-m) and Europe (+23% m-o-m).
“However, I do not think this number is sustainable. As winter comes, demand for palm oil traditionally falls in countries in the northern hemisphere as consumers switch to soyabean oil which does not solidify in colder temperatures. In fact, cargo surveyor Intertek Testing Services has reported a 5.9% drop in Malaysian palm oil exports for the first ten days of November,” said Lim.
“Furthermore, the economic outlook in Europe is uncertain. CPO prices have a strong 80% correlation with European GDP growth,” he added.
With European exports expected to fall, Lim said there is China which is still the biggest export market. “Year to date (YTD), Malaysia has exported over 3.34 million tonnes of palm oil to China, which represents 23% of total exports against last year’s 22% with 2.95 million tonnes,” said Lim.
He noted that the supply side would depend largely on the weather which can be difficult to predict. “There are two kinds of La Nina, mild and severe. A mild La Nina may not affect production very much as the fresh fruit bunch (FFB) harvesting process can still continue. However, a severe La Nina may disrupt FFB harvesting, especially if it rains during the day for several consecutive days,” he said.
“Excessive rain can also reduce yields affecting the pollination of (oil palm) flowers which results in fewers fruits,” Lim said, adding that the US climate prediction centre forecast that the La Nina weather would gradually strengthen and continue through the winter in the northern hemisphere.
However, he reckons the current La Nina will not be as bad as the one that ended in April. Lim expects CPO prices to stay between RM2,950 and RM3,050 per tonne until the end of the year.
CPO prices have slipped after reaching a seven-week high on Wednesday when January palm oil futures hit RM3,068 per tonne on the Bursa Malaysia Derivatives Exchange.
The average spot settlement price of CPO futures for October was RM2,839.70 per tonne, down from RM3,130 in September.
Lim has a negative price outlook and forecasts CPO prices to average RM3,000 per tonne in 2012 with a downward bias on expectations of weakening demand.
Planters and producers in the oil palm industry will continue to be profitable, said Lim, as costs are still below CPO prices. As CPO prices fall, he expects most plantation companies to underperform.
“One exception will be Ta Ann which has relatively young trees of about 4½ years old. We expect double-digit growth in earnings for the company as FFB yields will continue to increase until the trees peak at nine to 10 years old,” said Lim.
Lim gave an “outperform” call for Ta Ann Holdings Bhd, which has turned to plantation from timber. For FY11, Lim expects 80% of Ta Ann’s earnings to be derived from the oil palm segment.
Kenanga has an “underperform” call for Kuala Lumpur Kepong Bhd, IOI Corp Bhd and Genting Plantations Bhd and “market perform” for Sime Darby Bhd.
This article appeared in The Edge Financial Daily, November 11, 2011.
Inventory levels fell 1.55% to 2.1 million tonnes from September but remained significantly higher than the five-year average of 1.7 million tonnes.
Kenanga Investment Bank Bhd research analyst Alan Lim told The Edge Financial Daily that inventory levels were still very close to the all-time high of 2.27 million tonnes in November 2008. “The stock to usage ratio decrease to 8.8% from 10.5% in September this year has supported CPO prices recently,” he noted.
Demand has been mostly external with exports increasing by 19.04% month-on-month (m-o-m).
Lim said this was largely driven by exports to Pakistan (+80% m-o-m) and Europe (+23% m-o-m).
“However, I do not think this number is sustainable. As winter comes, demand for palm oil traditionally falls in countries in the northern hemisphere as consumers switch to soyabean oil which does not solidify in colder temperatures. In fact, cargo surveyor Intertek Testing Services has reported a 5.9% drop in Malaysian palm oil exports for the first ten days of November,” said Lim.
“Furthermore, the economic outlook in Europe is uncertain. CPO prices have a strong 80% correlation with European GDP growth,” he added.
With European exports expected to fall, Lim said there is China which is still the biggest export market. “Year to date (YTD), Malaysia has exported over 3.34 million tonnes of palm oil to China, which represents 23% of total exports against last year’s 22% with 2.95 million tonnes,” said Lim.
He noted that the supply side would depend largely on the weather which can be difficult to predict. “There are two kinds of La Nina, mild and severe. A mild La Nina may not affect production very much as the fresh fruit bunch (FFB) harvesting process can still continue. However, a severe La Nina may disrupt FFB harvesting, especially if it rains during the day for several consecutive days,” he said.
“Excessive rain can also reduce yields affecting the pollination of (oil palm) flowers which results in fewers fruits,” Lim said, adding that the US climate prediction centre forecast that the La Nina weather would gradually strengthen and continue through the winter in the northern hemisphere.
However, he reckons the current La Nina will not be as bad as the one that ended in April. Lim expects CPO prices to stay between RM2,950 and RM3,050 per tonne until the end of the year.
CPO prices have slipped after reaching a seven-week high on Wednesday when January palm oil futures hit RM3,068 per tonne on the Bursa Malaysia Derivatives Exchange.
The average spot settlement price of CPO futures for October was RM2,839.70 per tonne, down from RM3,130 in September.
Lim has a negative price outlook and forecasts CPO prices to average RM3,000 per tonne in 2012 with a downward bias on expectations of weakening demand.
Planters and producers in the oil palm industry will continue to be profitable, said Lim, as costs are still below CPO prices. As CPO prices fall, he expects most plantation companies to underperform.
“One exception will be Ta Ann which has relatively young trees of about 4½ years old. We expect double-digit growth in earnings for the company as FFB yields will continue to increase until the trees peak at nine to 10 years old,” said Lim.
Lim gave an “outperform” call for Ta Ann Holdings Bhd, which has turned to plantation from timber. For FY11, Lim expects 80% of Ta Ann’s earnings to be derived from the oil palm segment.
Kenanga has an “underperform” call for Kuala Lumpur Kepong Bhd, IOI Corp Bhd and Genting Plantations Bhd and “market perform” for Sime Darby Bhd.
This article appeared in The Edge Financial Daily, November 11, 2011.
