12 August 2008
MPOB stats for July 08
Palm oil inventory eases… Malaysian palm oil stocks in July fell mom as export growth outpaced production. Stocks dipped 3% mom to 1.98m tonnes, 10% lower than consensus estimate of 2.2m tonnes. The latest statistic is mildly positive for CPO price as it suggests that inventories are tighter than market estimates.
Figure 1: Malaysia’s palm oil stats for July 2008 (‘000 tonnes)
…thanks to higher exports. Malaysian palm oil exports jumped 25.2% mom in July as consumers replenished stocks ahead of the Ramadan and Deepavali festive season in October 2008. Palm oil exports to China surged 78% mom after dropping 22% mom in the previous month. We suspect that the drop in the previous month could have stemmed partly from the disruption of shipments to certain southern ports in China due to severe floods in southern China towards the middle of June. Also, we understand that the Chinese government had released edible oil reserves to large edible oil refiners in June.
We note the slowdown in exports to Pakistan and US in July and attribute it to seasonal factors. Overall, we are encouraged by the 16% yoy rise in demand for Malaysian palm oil in the first seven months of the year even in the face of higher CPO prices. This could be because palm oil continues to trade at a significant discount to soyaoil, its key competing edible oil. In Jul 08, CPO price stood at a 25% (US$383 per tonne) discount to soyaoil.
No major surprises in production. Turning to palm oil output, we observe that production in Jul 08 was in line with market expectations, rising 6.2% mom due to seasonal factors. On a yoy basis, output perked up 15% with the help of the recovery of FFB yields from the biological tree stress that had sapped yields in the previous year.
Figure 2: Malaysia’s monthly and YTD exports to selected destinations
Comments
CPO futures fell despite lower stockpile. CPO futures continued to trend lower yesterday despite the positive newflow in the form of the decline in palm oil inventories in July and the strong mom increase in palm oil exports in the first 10 days of Aug 08. Independent surveyor, Intertek estimated that Malaysia’s palm oil exports rose 15% mom in the first 10 days of Aug while Societe Generale de Surveillance (SGS) estimated a 23% mom increase. Palm oil for Oct delivery fell 3.8% (RM110 per tonne) yesterday to the year’s low of RM2,670 per tonne.
Since we downgraded the plantation sector on 18 July 2008, CPO futures has fallen by 22%. We attribute the recent sharp drop in CPO price to a few negative developments: (1) the 13% decline in crude oil price during the same period; (2) improved prospects for edible oil supplies; and (3) concern over a slowdown in edible oil consumption due to slower global economic growth.
Sentiment outweighs fundamentals. The unexpectedly steep and fast drop in CPO price has rattled sentiment in the palm oil market. It could lead to forced selling by brokers in the CPO futures market, sending CPO price below its fundamental-support price. Some palm oil traders may renege on their forward contracts in view of the sharp drop in selling price, which could delay shipments of palm oil to destination markets if it gets out of hand. We may also see some redemption of commodity funds by investors, which is evidenced from the lower volume of open interest futures contracts for palm oil-related products traded on CBOT. This could aggravate the fall in the prices of palm oil and its related products. Given the price volatility, buyers are likely to run down inventories and buy only what they need in anticipation of buying at lower prices later.
Potential rebound when positive catalysts emerge. Overall, these factors could push CPO price below its fundamental support price until some positive re-rating catalysts emerge, for example, a resurgence of crude oil price and a weather-induced shortfall in edible oil supply. We think that CPO price could rebound as we enter the 4Q given the potential setbacks in US soybean harvest due to earlier weather concerns, stronger demand for palm oil as China buys ahead of Chinese New Year in late Jan 09 and a seasonal decline in palm oil output towards the end of the year. In view of these potential catalysts, we retain for now our CPO price forecasts of RM3,350 for 2008 and RM3,000 for 2009.
Valuation and recommendation
Maintain UNDERWEIGHT call. There is no change to our earnings forecasts for all the planters as our CPO price forecasts remain intact. However, we recently cautioned in our 8 Aug sector note that there may be downside risk to our 2009 CPO price if oilseed crop prospects in key planting areas continue to improve. We continue to rate the sector an UNDERWEIGHT due to concerns over the increasing volatility of CPO price, emerging concern over the unwinding of funds from the commodity market, planters’ rising operating costs and the potential U-turn of biofuel policy in Europe and the US. The recent share price correction for plantation stocks has wiped out the P/E premium accorded to the sector relative to the market but it has not factored in the rising downside risk to CPO price. Key de-rating catalysts are the softening CPO price outlook, lower crude oil price and higher-than-expected operating costs.
Figure 3: Sector comparisons
No comments:
Post a Comment