Plantation sector
Maintain “neutral”. A survey of 19 Malaysian planters conducted by the CIMB Research futures team revealed that crude palm oil (CPO) production in November probably fell 5% month-on-month (m-o-m) to 1.8 million tonnes. This could be due to seasonal factors and tree stress from the drought experienced in Peninsular Malaysia in the first quarter of financial year ending 2014.

The survey revealed that peninsula estates posted the biggest decline in CPO production (-16% to -6% m-o-m) while Sabah may be the best-performing region for output (-9% to +8% m-o-m).

Malaysian palm oil exports were weak, falling by around 10% m-o-m in November, based on cargo surveyor reports by Intertek Group plc (-9.8%) and SGS SA (-10.5%).

This was due to weaker exports to India, Pakistan (lower post-festival demand and competition from other oilseeds) and Europe (due to the onset of winter).

We have assumed domestic consumption of 294,000 tonnes and imports of 83,000 tonnes in November. Based on the above assumptions, we project that palm oil stocks at end-November will rise by 7% m-o-m to 2.3 million tonnes. The Malaysian Palm Oil Board (MPOB) is set to release the official figures on Dec 10. The variance in our survey from actual MPOB stock figures since we started producing the monthly stock preview in August has been 0% to 5%.

The key takeaway from our survey is the smaller-than-expected drop in output. This, combined with weaker-than-expected exports, is likely to lift the end-November Malaysian palm oil inventory to a 21-month high of 2.31 million tonnes. We view this as negative for CPO prices in the short term as it indicates ample stock in the producing palm oil market.

Malaysian palm oil stocks are likely to fall this month due to the seasonal drop in output while exports are likely to be relatively stable in view of the upcoming Chinese New Year festivities. Our key concern is the recent sharp decline in crude oil prices (Brent) to US$72 (RM248) per barrel, which has significantly reduced CPO’s competitiveness as a source of energy in the form of biodiesel.

CPO prices have remained relatively resilient against the fall in crude oil prices so far due to concerns about weaker palm oil output, higher biodiesel mandates and adverse weather effects on key planting areas due to a potential El Nino occurence. The Australian Government Bureau of Meteorology in its latest update revealed that most climate indicators remain close to El Nino thresholds, with climate model outlooks suggesting further intensification of conditions likely.

Spot CPO prices have fallen by 2% in the past month to RM2,136 per tonne due to the weaker demand for CPO. The average CPO price achieved in the first 11 months of financial year ending 2014 (RM2,402.5 per tonne) was in line with our full-year projection of RM2,390 per tonne. We maintain our “neutral” sector rating and continue to prefer planters that offer strong output growth prospects to offset weaker prices.— CIMB Research, Dec 2

This article first appeared in The Edge Financial Daily, on December 4, 2014.