KUCHING: Malaysia’s crude palm oil (CPO) saw its stockpile rise despite a surge in production, spurred by robust biodiesel factors as well as an increase in palm oil consumption.
According to analysts Alvin Tai and Hoe Lee Leng, RHB Research Institute Sdn Bhd (RHB Research) in a recent note, Malaysia’s palm oil stockpile rose by a paltry of one per cent to 1.66 million tonnes in July despite an 18 per cent surge in production.
The analysts explained that Malaysia’s crude palm oil (CPO) production surged by 258,000 tonnes, or 18.2 per cent month-on-month (m-o-m), to 1.675 million tonnes in July, as the seasonal upswing began in earnest. Sabah was the weakest with a 12.8 per cent rise, while West Malaysia and Sarawak’s production rose by 18.3 and 26.8 per cent respectively.
Despite the strong surge in production, Tai and Hoe highlighted that palm oil stockpile only rose moderately due to a sharp increase in local palm oil consumption to a record high of 289,900 tonnes.
“Part of the surge was due to near-record biodiesel exports, but, more importantly, the conversion of CPO to biodiesel for local consumption.
“We believe the mandatory five per cent biodiesel rollout in Johor in July has a lot to do with the rise in local palm oil consumption, and we think the next rollout for northern states of West Malaysia could be brought forward from the October target,” they outlined.
Meanwhile, the analysts noted that CPO exports remained sluggish as Malaysia’s palm oil export was flat at 1.419 million tonnes, with an increase in shipments to India and China helping to cushion a general slowdown in exports.
In a separate note, analyst Alan Lim from the research arm of Kenanga Investment Bank Bhd (Kenanga Research) said that there has been good demand from China and India as higher exports was registered to China (an increase of 12 per cent m-o-m to 304,000 metric tonne) and India (an increase of 24 per cent to 166,000 metric tonne).
“However, this was neutralised by lower export to European Union (a decrease of 29 per cent m-o-m to 144,000 metric tonne) and Pakistan (a decrease of 23 per cent to 129,000 metric tonne),” he explained.
Nevertheless, Lim said that better palm oil demand from China should be supported by the sustained warmer weather since July. In addition, the analyst noted exports should grow nine per cent m-o-m as stock-up activity is expected to pick up in China ahead of the Moon Cake Festival which falls on September 19.
As for India, Lim added there could be some stronger purchase ahead of a potential hike in import tax.
He further said, “European consumers may have chosen to use more rapeseed oil in view of its declining prices in July while demand from Pakistan may have normalise after the end of pre-Ramadhan stock up activity.”
Apart from that, in a near term, RHB Research analysts noted that besides the peak crop season, the near-term upside to palm oil prices is capped by soybean supply. The research firm added that China’s soybean import continues to rise, indicating an abundance of supply.
“The speculative net long position for soybean is also on a decline, while soybean oil’s spread against palm oil plunged to US$209 per tonne currently from US$282 a month ago,” the analysts explained.
On a positive note, crude oil prices remain stable, which lends support to biodiesel demand. RHB Research’s analysts opined, “We see possible price strength in fourth quarter of 2013 (4Q13), if Indonesia’s production continues to disappoint and biodiesel demand remains strong.”
Lim, on the other hand, estimated that August 2013 total supply of 1.84 million metric tonne may exceed total demand of 1.75 million metric tonne which should increase inventory level by 0.09 million metric tonne.
“On the supply side, we have assumed seven per cent increase m-o-m to 1.79 million metric tonne in line with seasonal trend.
“However, there is still risk of production coming below our estimate due to the Hari Raya celebrations as harvesting may be affected as plantation workers take long leaves.
“We do not think that the five per cent increase in inventory is a major concern as CPO prices should be supported by strong crude oil prices and a weak ringgit,” Lim said.
Aside from that, analyst Lim noted that the threat of La Nina has subsided as Southern Oscillation Index (SOI) reading has returned to neutral zone after staying in La Nina zone in June and July.
“We gather that the latest value is seven (as of August 11) and this is below the level eight which indicates La Nina weather condition.
“We noticed that the Australian Bureau Of Meteorology tone is now stronger on the possibility of neutral weather condition as it mentioned that ‘the El Nino-Southern Oscillation (ENSO) clearly remains in the neutral phase despite some indicators approaching La Nina thresholds at times in recent months’. Overall, this means limited upside for CPO prices,” Lim explained.