Malaysia's December palm oil inventory tops 2-Year high

11.01.2018

Malaysia's palm oil inventory rose for the sixth straight month in December to more than two-year high as supply outstripped demand, pressuring shares of plantation companies.

Stockpile rose 7.1% to 2.73 million tons in December from 2.55 million tons a month earlier, the Malaysian Palm Oil Board said in a statement. Production declined 5.7% month-on-month to 1.83 million tons, while exports rose 4.4% to 1.42 million tons in December from a month earlier.

Analysts said palm oil prices could rise in the first quarter and then weaken as favourable weather outlook suggests output to remain robust, which could further swell the stockpile. A government decision to temporarily suspend tax on export of palm oil, meanwhile is expected to benefit crude palm oil producers but hurt refiners.

"We had expected 3% to 5% growth in stockpiles, but the data shows stock levels rose 7% month-on-month," said Phillip Futures' analyst David Ng. "We are concerned about the rising inventory levels, which could have a negative impact on prices."

Shares of some of Malaysia's largest palm oil producers fell on Wednesday following the data. Sime Darby Plantation was down 0.4%, IOI Corporation declined 0.2% and Kuala Lumpur Kepong was 0.2% lower. Felda Global Ventures Holdings, a Malaysian state-run palm oil producer, rose 4.1%.

"We foresee 2018 to be another challenging year for plantation companies as CPO price is expected to hold lower than last year," said BIMB Securities' analyst Noorhayati Maamor. "Earnings of plantation companies, especially pure planters could be under pressure."

Prices of the edible oil used in everything from lipstick to ice cream have declined about 20% in 2017. Malaysia and Indonesia are the top two palm oil producing nations, collectively supplying nearly 90% of the world's demand.

Weather researchers expect that there is an 80% chance that the current La Nina weather condition could last until the end of the first quarter. La Nina brings heavy showers, which could boost palm oil yield, although excessive rains could result in floods that disrupt plantation activities.

Rising inventories in Indonesia and Malaysia are indicative of supply outweighing demand, Ling Ah Hong, a director at plantation research firm Ganling, said Tuesday at an industry conference in Kuala Lumpur. That could push prices down by some 12% this year, he said.

"With good rainfall in the last 12 months and coming six months, we can expect supply in Indonesia and Malaysia to resume normal growth trajectory," said Ling. "Rising inventories would be bearish for prices unless we can find a home for an additional four million tons coming on-stream in 2018."


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