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Mixed Outlook For Palm Oil Futures
Malaysia Perspective | 21 January 2013

By Joshua Lim

The stronger than expected 2.628 million metric tonnes (MT) Malaysian palm oil inventory for December 2012 announced by the Malaysia Palm Oil Board (MPOB) did not do any favours for Malaysian exporters. The total which equates to a 2% m-o-m increase and a 28% y-o-y was compounded by relatively flat exports, as shipments to China surprisingly dropped even ahead of the tighter CIQ (China Inspection and Quarantine) regulations effective 1 January 2013. Analysts believe, this was because of stock levels in Chinese ports, which have been piling up rapidly from 780,000 MT at the end of November 2012 to more than 1million MT at end of December 2012 (a 62% increase y-o-y).

This had led analysts to be bearish about crude palm oil (CPO) futures prices on Bursa Malaysia Derivatives. Experts believe the new export tax structure for palm oil, introduced on January 1, this year, would take more than three months to yield results. With the introduction of the export tax, Malaysian palm oil would be much cheaper than that produced by Indonesia and this would spur demand for the golden crop.

BV Mehta, the executive director of the Solvent Extractors Association (SEA) of India was concerned about the effect this had on India’s imports of the golden crop: “Malaysian exporters will take full advantage of the zero tax to ship as much CPO as possible in January, to reduce their huge stock of over 2.5 million tonnes. In this process, India being a large importer, shall become a dumping ground for CPO and we would not be surprised to see a record import of CPO and RBD palm olein during January itself. This will have a serious impact on the price of domestic oils and oilseeds.”

Mixed View On Recovery
As a trend, Malaysian palm oil output regularly sees an average seasonal drop of 11% m-o-m in the month of January and a further 6% m-o-m in February, over the past ten years. Meanwhile, exports declined by 5% and 8%, respectively, over the same period. Hence, unless exports fall steeper than usual, some analysts believe, Malaysian palm oil inventory may be close to peaking. As it is, the current price of palm oil-based biodiesel is below diesel price.

However some analysts are expecting sustained palm oil price recovery in 1H-2013, but it could weaken again in 2H-2013 on strong y-o-y supply growth. UOB Kay Hian (Malaysia) Holdings Sdn Bhd (UOB Kay Hian) in its report stated that with stronger CPO production in 2013, Malaysia’s CPO production was likely to grow between three per cent and five per cent y-o-y to between 19 million tonnes and 19.3 million tonnes as yield recovery from the lagged impact from 2009/2010’s El Nino in the first half of 2012 continued.

Indonesia, on the other hand, was forecasted to produce between 28.6 million tonnes and 29 million tonnes of CPO. As supply increases, demand was also expected to pick up after the winter season, the research firm pointed out. The net increase in global palm oil demand for 2013 and 2014 were projected to come in at 3.5 million tonnes and four million tonnes respectively, driven by low CPO prices and demand from the energy sector.

Interband Group Senior Palm Oil Trader Jim Teh opines that the market would continue to ease sharply following the 2.63 million tonnes of CPO stocks reported for December. Teh said traders would also remain cautious after the release of lower export data by cargo surveyors, Intertek Testing Services and Societe Generale de Surveillance, recently.

“Malaysia’s palm oil exports declined as the winter season saw buyers India and China switching to domestic oilseed supplies as palm oil tends to crystallise in colder weather,” he said.

Teh said the weaker price would however attract physical buyers, creating demand for the commodity and help clear high inventories.

Experts see two opportunistic situations for investors. They could either take advantage of any short-term sell-off in plantation counters, or they could do nothing and exit when prices recover. Hwang DBS Vickers suggests a “Buy” on weakness for main counters. However, they believe that KL Kepong (KLK) remains “Fully Valued” on 16% downside to its TP.

* This article is based on information from research houses, analysts and media agencies

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