KUCHING: Malaysia’s crude palm oil (CPO) inventory level for August 2012 was reported at 2.12 million metric tonnes (MT), indicating a six per cent month-on-month (m-o-m) increase – a pace that was expected to continue through the third quarter of 2012 (3Q12).
“The strong CPO production of 1.66 million MT outpaced the export volume of 1.43 million MT, causing inventories to inch 0.12 million MT higher to 2.12 million MT,” said Alan Lim Seong Chun, an analyst from Kenanga Investment Bank Bhd (Kenanga Research).
According to the OSK Research Sdn Bhd (OSK Research), palm oil inventory would begin to decline soon, driven by two key factors: a seasonal downtrend in palm oil production – which the research house expected would hit its peak either in this month or next and subsequently soften – and a substitution effect arising from soybean oil’s shortage.
Lim expected the trend of production outpacing export to continue through the third quarter, thereby keeping inventory levels above two million MT. As such, the CPO price upside should be limited in the near term.
The CPO production decline of two per cent m-o-m in August 2012 was caused by the fewer number of fresh fruit bunch (FFB) harvesting days as a result of the Hari Raya festive season. For September 2012, Lim expected CPO production to surge 12 per cent m-o-m to 1.86 million MT in line with seasonal factors and the return of the harvesting process to its normal level.
The analyst explained that a strong CPO production pick-up would limit the upside for CPO prices due to the abundant supply.
“Peninsular Malaysia’s production, which constituted about 56.7 per cent of the country’s production in August fell 5.1 per cent m-o-m.
The y-o-y monthly production has narrowed significantly from a high of 20.6 per cent in May to just 0.3 per cent last month, indicating that the production has recovered substantially y-o-y,” OSK Research stated in its research report.
“Exports increased 10 per cent m-o-m in August 2012 to 1.43 million MT as demand growth was better in all the key CPO consumer countries except Europe and Pakistan,” said the Kenanga Research analyst.
He noted that the highest increase was seen in China and India which saw 36 percent and 50 per cent increase m-o-m, believing that the two countries might have purchased more CPO as a cheaper soybean oil substitute.
OSK Research added that, the US soybean crop had deteriorated further following the late arrival of rain and damage accused by Hurricane Isaac.
“The US soybean crop is expected to decline by 10.7 tonnes to 73.3 tonnes in the September 2012 to August 2013 period. The US soybean reserve is now at at four-decade low,” said OSK Research.
On a year-on-year (y-o-y) basis however, exports tumbled by 16 per cent which Lim believed was attributable to the slower economic expansion in China and Europe.
This was believed to have affected the overall CPO demand growth in both the food and biodiesel industries.
Following a latest Southern Oscillation Index (SOI) natural level-reading of negative 0.4 as of September 7, Lim believed that a strong El Nino was unlikely in the near term.
While there is a possibility for El Nino to return, it was expected to be a weak one which would cause ‘little excitement’ to CPO prices.