Plantations - Preview of Dec palm oil stocks
Recommendation: Neutral
A survey conducted by our futures team revealed that Malaysian palm oil output is likely to fall by 22% mom to 1.36m tonnes due to seasonally low production and severe flooding in the East Coast states in Dec 2014. Palm oil exports fell by 0.9% as stronger demand from India cushioned weaker imports by China. Overall, we expect Malaysian palm oil inventory to decline by 12% mom to a 5-month low of 2m tonnes in Dec 2014. The lower inventory is near-term positive for CPO prices. However, this is offset by the concerns about biodiesel demand risk due to the weak crude oil prices. We maintain our Neutral sector call and prefer planters like First Resources, AALI and SIMP.
What Happened
A survey of 17 Malaysian planters conducted by the CIMB futures team revealed that CPO production in Dec probably fell 22% mom and 19% yoy to 1.36m tonnes. This could be due to: 1) seasonal factors (typically, Dec-Feb is the low production season for palm oil), 2) the worst flooding in the east coast states of Peninsular Malaysia in 30 years, and 3) tree stress from the drought experienced in Peninsular Malaysia in 1Q14. The survey revealed that the Peninsular estates posted the biggest decline in CPO production (-12% to -70% mom). The Sarawak estates registered a lower drop in output of (-9% to -25%) than the Sabah estates, which posted a decline of 12% to 40%. Malaysian palm oil exports fell by only 0.9% mom in Dec, based on cargo surveyor reports by Intertek (-0.87%) and SGS (-0.92%). Stronger demand from India (traders buying ahead of the 5% pt hike in import duties on edible oils on 25 Dec 2014) offset the weaker demand from China. We have assumed domestic consumption of 225k tonnes and imports of 99k tonnes in Dec. Based on the above assumptions, we project that palm oil stocks at end-Dec will fall by 12% mom to 2m tonne. MPOB is set to release the official figures on 12 Jan. The variance in our survey from actual MPOB stock figures since we started producing the monthly stock preview in Aug 2014 has been 0% to 5%.
What We Think
The key takeaway is that palm oil output for Dec 2014 is likely the weakest achievement for the month of Dec since 2010. This, combined with relatively-resilient exports will reduce palm oil stocks in Malaysia to a 5-month low of 2m tonnes. We view this to be short-term supportive for CPO prices as it suggests lower stockpiles in the producing market. Malaysian palm oil stocks are likely to fall further in Jan due to the seasonal drop in output, as well as the ongoing floods, while exports are likely to be relatively stable in view of the upcoming Chinese New Year festivities. Our key concern continues to be the sharp decline in crude oil prices (Brent) to US$56/barrel, which has significantly reduced CPO’s competitiveness as a source of energy in the form of biodiesel. CPO prices have been fairly resilient against the fall in crude oil price so far due to concerns about weaker palm oil output and adverse weather effects due to possible El Nino event. The Australian Government Bureau of Meteorology revealed in its latest update that surface temperatures of the equatorial Pacific Ocean have exceeded El Nino thresholds for several weeks and there is a greater than 70% chance of the weather pattern emerging.
What You Should Do
Spot CPO prices have risen by 8% over the past two weeks to RM2,282 per tonne due to concerns about weaker supply. We maintain our view that CPO price will remain range-bound in the near term and average RM2,460 per tonne in 2015.
Source: CIMB Daybreak - 05 January 2015
Recommendation: Neutral
A survey conducted by our futures team revealed that Malaysian palm oil output is likely to fall by 22% mom to 1.36m tonnes due to seasonally low production and severe flooding in the East Coast states in Dec 2014. Palm oil exports fell by 0.9% as stronger demand from India cushioned weaker imports by China. Overall, we expect Malaysian palm oil inventory to decline by 12% mom to a 5-month low of 2m tonnes in Dec 2014. The lower inventory is near-term positive for CPO prices. However, this is offset by the concerns about biodiesel demand risk due to the weak crude oil prices. We maintain our Neutral sector call and prefer planters like First Resources, AALI and SIMP.
What Happened
A survey of 17 Malaysian planters conducted by the CIMB futures team revealed that CPO production in Dec probably fell 22% mom and 19% yoy to 1.36m tonnes. This could be due to: 1) seasonal factors (typically, Dec-Feb is the low production season for palm oil), 2) the worst flooding in the east coast states of Peninsular Malaysia in 30 years, and 3) tree stress from the drought experienced in Peninsular Malaysia in 1Q14. The survey revealed that the Peninsular estates posted the biggest decline in CPO production (-12% to -70% mom). The Sarawak estates registered a lower drop in output of (-9% to -25%) than the Sabah estates, which posted a decline of 12% to 40%. Malaysian palm oil exports fell by only 0.9% mom in Dec, based on cargo surveyor reports by Intertek (-0.87%) and SGS (-0.92%). Stronger demand from India (traders buying ahead of the 5% pt hike in import duties on edible oils on 25 Dec 2014) offset the weaker demand from China. We have assumed domestic consumption of 225k tonnes and imports of 99k tonnes in Dec. Based on the above assumptions, we project that palm oil stocks at end-Dec will fall by 12% mom to 2m tonne. MPOB is set to release the official figures on 12 Jan. The variance in our survey from actual MPOB stock figures since we started producing the monthly stock preview in Aug 2014 has been 0% to 5%.
What We Think
The key takeaway is that palm oil output for Dec 2014 is likely the weakest achievement for the month of Dec since 2010. This, combined with relatively-resilient exports will reduce palm oil stocks in Malaysia to a 5-month low of 2m tonnes. We view this to be short-term supportive for CPO prices as it suggests lower stockpiles in the producing market. Malaysian palm oil stocks are likely to fall further in Jan due to the seasonal drop in output, as well as the ongoing floods, while exports are likely to be relatively stable in view of the upcoming Chinese New Year festivities. Our key concern continues to be the sharp decline in crude oil prices (Brent) to US$56/barrel, which has significantly reduced CPO’s competitiveness as a source of energy in the form of biodiesel. CPO prices have been fairly resilient against the fall in crude oil price so far due to concerns about weaker palm oil output and adverse weather effects due to possible El Nino event. The Australian Government Bureau of Meteorology revealed in its latest update that surface temperatures of the equatorial Pacific Ocean have exceeded El Nino thresholds for several weeks and there is a greater than 70% chance of the weather pattern emerging.
What You Should Do
Spot CPO prices have risen by 8% over the past two weeks to RM2,282 per tonne due to concerns about weaker supply. We maintain our view that CPO price will remain range-bound in the near term and average RM2,460 per tonne in 2015.
Source: CIMB Daybreak - 05 January 2015
