Maintain neutral: Palm oil inventories continued rising for the third consecutive month, closing at 2.09 million tonnes, which incidentally is also the highest level since April 2013. On a more positive note, the zero export tax coupled with low palm oil prices helped exports, which may otherwise have had a more telling effect on the inventory build-up.
Meanwhile, September 2014’s average crude palm oil (CPO) price fell to RM2,089 per tonne from RM2,152 per tonne in August and was also relatively weaker compared to September 2013’s RM2,354 per tonne. CPO prices dipped to RM1,942 per tonne, the lowest level in five years before slowly recovering to the current level of RM2,204 per tonne. We maintain our full-year crude palm oil price assumption of RM2,450 per tonne and RM2,550 per tonne for 2014 and 2015 respectively.
Palm oil exports improved 13.3% month-on-month (m-o-m) and 1.2% year-on-year. Despite weaker m-o-m demand from Pakistan (-50.4%) and the United States (-26.4%), exports were driven by stronger demand from China (+5.1%), Europe (+5.6%), India (+22.5%) and other nations (+27%). Year-to-date, palm oil exports came down by 6%, mainly due to a strong decline of demand from China, Pakistan and the US.
The zero exports tax coupled with the upcoming Deepavali celebration has, however, encouraged stronger buying interest from India. Imports may slow in coming months though, because of the congestion at ports and rising stockpiles, which probably reached two million tonnes at the end of September.
Monthly CPO production in Peninsular Malaysia and East Malaysia was down 9.1% and 3.7% respectively. Overall, Malaysia’s production dropped 6.6% to 1.89 million tonnes while fresh fruit bunch (FFB) yield averaged at 1.82 tonners per hectare compared to 1.94 tonnes per hectare in August. We expect production to remain high for the next two months.
According to independent market surveyor Intertek, the first 10 days of October saw a drop of 19% in exports compared to the same period in September.
We prefer Genting Plantations and Ta Ann given their strong FFB production in the coming years, which will boost their earnings significantly. Sime Darby, which has remained a laggard amongst the plantation players, is expected to be in the spotlight driven by a series of potential corporate exercises.
— PublicInvest Research, Oct 13
This article first appeared in The Edge Financial Daily, on October 14, 2014.