KUCHING: Plantation players are expected to see a gloomy fourth quarter (4Q12) as earnings are forecasted to tumble by at least 30 per cent year-on-year (y-o-y) driven by expected lower prices of average spot crude palm oil (CPO) prices and higher cost of production.
According to a report by the investment arm of Kenanga Investment Bank Bhd (Kenanga Research), “In 4Q12, average spot CPO prices are expected to drop by around 25 per cent to RM2,250 per metric tonne (MT) compared with RM3,014 per MT in the same period in 2011.”
“Cost of production may have also increased by approximately five per cent due to higher labour cost. Although CPO production should increase by about seven per cent y-o-y in 4Q as the tree stress effect wanes, this will not be enough to prevent earnings from declining severely.”
On a quarter-to-quarter basis, cost of production should have stabilised while fresh fruit bunch (FFB) volume was expected to stay flat.
Kenanga Research thus believed that 4Q12 earnings would track CPO prices movement which had plunged from early October this year onwards due to a surge in inventory to a record high in the September to October period.
November CPO inventory is thus expected to remain near record-high level at 2.49 million MT. The research house noted that despite the slight decline of one per cent month-on-month (m-o-m) for inventory, it remained significantly higher by 20 per cent on a y-o-y basis.
“On the demand side, we have assumed CPO exports to increase by five per cent m-o-m to 1.85 million MT in November as Chinese traders are expected to stock up refined palm oil ahead of tighter regulations on edible oil imports from 2013 onwards.”
The research house highlighted that exports to India and Pakistan might have normalised after the end of Deepavali and Hari Raya Haji festivities in mid-November. On the supply side, Kenanga Research assumed six per cent m-o-m decline of CPO production to 1,82 million MT, in line with historical seasonal FFB volume decline in November.
Kenanga Research’s previous assumption for CPO prices was RM2,975 for 2012 and RM3,000 for 2013. However, against the average CPO prices of RM3,219 registered in 2011, the research house expected CPO prices to decline by 10 per cent y-o-y to RM2,900 in 2012 followed by another decline of two per cent to RM2,850 in 2013.
“In our CPO price forecast model using the multi-regression method, we have now assumed higher ending inventory of 2.48 million MT and 2.38 million MT for 2012 and 2013 instead.”
Going forward, Kenanga Research did not expect a strong El Nino in the near term as the Southern Oscillation Index had been at the neutral level. On the other hand, it expected high discount against soybean oil to linger for some time.
“The northern hemisphere is entering winter season soon, during this period, palm oil is generally not used as it tends to solidify. As a result, competing oils such as soybean and rapeseed,” Kenanga Research explained.