A Calculated Game Plan
by Justin Yap, firstname.lastname@example.org. Posted on June 17, 2012, Sunday
Plantation: Early indications of a slow recovery
Market research concluded that earnings growth for Malaysian plantation sector might only be visible in 2H12 and crude palm oil (CPO) production would only stage a strong recovery by then as it entered its seasonal peak production period, but the question was how robust were the fundamentals?
Maybank Investment Bank Bhd (Maybank IB) forecasted CPO prices to average RM3,150 per tonne in 2012 and RM3,000 per tonne in 2013-2014 after factoring in all the possibilities.
Kenanga Investment Bank Bhd (Kenanga) however made a call with an average CPO price of RM3,200.
“Second quarter (2Q12) results aren’t going to be fantastic either on a y-o-y basis, judging from recently released Malaysia Palm Oil Board (MPOB) statistics and CPO spot prices,” said Maybank IB plantation analyst Ong Chee Ting in a report recently.
He pointed out the key takeaway from May 2012 MPOB statistics was that Malaysia’s CPO production fell 16.8 per cent and 20.6 per cent y-o-y respectively in April- May 2012 but rose 5.1 per cent to 8.7 per cent month-on-month (m-o-m).
CPO average selling price (ASP) for the 2Q to June 11 averaged RM3,295 per tonne.
Amidst a stillweak spot price of approximately RM3,000 per tonne, 2Q12 CPO ASP might average RM3,225 per tonne, marginally higher than the 1Q12 CPO ASP of RM3,218 per tonne.
“Unless June CPO production recovers strongly enough to pull up overall production figures in 2Q12, we believe 2Q12 results are likely to be weak y-o-y. They should however be stronger quarter- on-quarter (q-o-q) on higher output, after seasonally weak 1Q production,” Ong commented.
On another note, Kenanga analyst Lim Seong Chun said CPO prices should surge if El Nino returned in 2H12. According to him, research gathered from Australia Bureau of Meteorology indicated that conditions were likely to approch or possibly exceed El Nino thresholds during the Australia late winter to early spring period.
In addition, the US Climate Prediction centre mentioned that there was a 50 per cent chance that El Nino conditions would develop during 2H12.
“To conclude, there are increasing chances for El Nina to return as the 30-day Southern Oscillation Index (SOI) values have remained on the negative side of neutral over the past two weeks,” said Lim.
“Sustained SOI negative values below minus eight will confi rm the return of an El Nino event,” he added.
“We expect CPO prices to surge if El Nino is confirmed as fresh fruit bunch (FFB) production may be reduced by a staggering 30 per cent depending on the severity of the El Nino.”
Export wise, there were no negative impacts as the demand from both Pakistan and Europe still remained resilient. It increased five per cent m-o-m in May 2012 to 1.4 million metric tonne (mt), which was more than enough to offset the lower demand from China and India.
Among the key CPO consumers, the highest growth was seen in Pakistan with plus 80 per cent m-o-m to 175,000 mt and Europe with plus 11 per cent m-o-m to 226,000 mt.
“The strengthening CPO exports to Pakistan were probably caused by CPO purchases ahead of the Ramadhan month, which will begin around July 21, 2012.
“European demand for palm oil may have increased too due to a higher usage of palm oil as cheaper feedstock for biodiesel after its winter season ended,” said Lim.
After taking into account the lower than expected CPO production at 1.38 million mt, “We have trimmed our 2012 production by 0.2 million mt to 18.6 million mt.
Our current estimate of 18.4 million mt is lower than Dorab Mistry’s estimated range of 18.6 million to 19 million mt and Oil World’s estimate of 18.9 million mt.
“As the first five months CPO production of 6.34 million mt make up only about 34 per cent of 2011 production of 18.9 million mt, it will be quite hard for the industry to produce such a high output mained again,” Lim concluded.