Plantation Sector
Maintain neutral: A survey of 18 Malaysian planters conducted by the CIMB futures team revealed that crude palm oil (CPO) production was weaker in September. This could be due to: (i) a record harvest in August (due to the spillover of harvesting from Ramadan); (ii) potential tree stress from the drought experienced in Peninsular Malaysia in the first quarter of 2014; and (iii) fewer working days in September than  August.

The survey revealed that CPO production in September could fall by 5.1% month-on-month (m-o-m) to 1.93 million tonnes. We gather that Sabah estates posted the biggest decline in CPO production (-22% to +5% m-o-m), followed by Peninsular Malaysia (-15% to 0% m-o-m) and Sarawak (-11% to +8% m-o-m).

Malaysian palm oil exports were strong, improving by 16% m-o-m in September, based on the cargo surveyor reports by SGS (+16.5%) and Intertek (+16.3%). This was due to higher exports to India and Europe following the government’s decision to scrap export taxes on CPO for September and October.

We have assumed domestic consumption of 232,000 tonnes and imports of 18,000 tonnes in September. Based on these assumptions, we project that palm oil stocks at end-September will rise by 1.95% m-o-m to 2.09 million tonnes.

The Malaysian Palm Oil Board (MPOB) is set to release the official figures tomorrow.

The main takeaway from our survey was the weaker palm oil output in September. This, combined with stronger exports, will result in a marginal m-o-m increase in Malaysian palm oil inventory for September, which is below our previous projection.

We view this to be only short-term supportive of CPO prices. We project that Malaysian palm oil stocks could rise further in October, as we expect weaker palm oil exports due to rising competition from Indonesia, which recently cut its export tax on CPO to zero. In addition, the recent decline in crude oil price (Brent) to US$93 (RM305.04) per barrel will reduce CPO’s competitiveness as a feedstock for biodiesel to RM2,128 per tonne, based on our estimates.

Spot CPO prices have risen by 13% in the past month to RM2,184 per tonne due to the better-than-expected demand for palm oil, weaker output and the government’s decision to cut the export tax from 4.5% to 0% in September. The average CPO price achieved for the first nine months of 2014 (RM2,441 per tonne) was below our full-year projection of RM2,700 per tonne. As such, there is downside risk to our earnings forecasts for the planters and we will review our CPO price forecasts soon. We maintain our “neutral” sector rating and continue to prefer planters that offer strong output growth prospects. — CIMB Research, Oct 7

This article first appeared in The Edge Financial Daily, on October 9, 2014.