Plantation sector
Maintain “neutral”: November’s crude palm oil (CPO) production staged a decline. CPO production in November declined 7.5% month-on-month (m-o-m) and 5.9% year-on-year (y-o-y) to 1.75 million tonnes. This was attributable to lower fresh fruit bunch yield from key palm oil-producing states, namely Johor, Pahang, Perak and Sarawak.

Moreover, milling utilisation rate for November had also dropped by 6.8% m-o-m. Despite the decline in November’s production, the cumulative CPO production from January to November is still higher by 4.3% y-o-y. For 2014, we are expecting CPO production in Malaysia to reach approximately 19.7 million tonnes, 2.6% higher compared with CPO production in 2013.

Despite higher exports to China (+45.5% m-o-m) and India (+2.5% m-o-m), total palm oil exports in November declined by 6.1% m-o-m and 1.0% y-o-y to 1.51 million tonnes. The decline in exports was mainly attributable to lower offtake from the European countries (-19.5% m-o-m), and Pakistan (-42.0% m-o-m) and the United States (-40.3% m-o-m).

Cumulatively, total palm oil exports from January to November 2014 were weaker by 5% compared with the same corresponding period of last year. The weak export numbers this year were caused by lower purchases from China, the largest buyer of Malaysia’s palm oil, due to the slowdown in its economy.

Besides the slowdown in economic activity in China, we believe that weaker palm oil exports were also attributable to lower crude oil prices which  affected the production of biodiesel, hence reducing the demand for palm oil as a feedstock.

Imports of palm oil in November increased for the third consecutive month to 98,940 million tonnes in November. This was the second highest level since January this year.

We believe that the significant increase in palm oil imports was mainly due to the zero CPO export tax regime in Indonesia. Palm oil product prices from Indonesia are normally cheaper compared with Malaysia’s due to some cost advantages. Therefore, zero CPO export tax in Indonesia has attracted the interest of many Malaysian refiners.

Higher imports brought palm oil inventory to 2.3 million tonnes. Higher imports coupled with weaker exports performance had pushed palm oil inventory in November higher by 5.2% to 2.3 million tonnes, the highest since February 2013.

In the next couple of months, we do not anticipate a strong rebound in external demand. This will consequently sustain palm oil inventory in Malaysia at levels above two million tonnes. High inventory normally creates jitters in the palm oil market and limits the upside potential of CPO prices.

In the immediate term, we do not foresee any strong catalysts to lift sentiment and palm oil prices.

We reiterate our “neutral” stance on the plantation sector with an unchanged average CPO price assumption of RM2,650 per tonne for 2015. — MIDF Research, Dec 11

This article first appeared in The Edge Financial Daily, on December 12, 2014.