Palm oil stocks higher in March on stronger production in Sarawak

12.04.2018

Malaysia palm oil stocks at end-March was higher than most expected on stronger production in Sarawak.

As per the Malaysian Palm Oil Board’s (MPOB) statistics on monthly closing stock of oil palm products for the month of March 2018, total palm oil inventory amounted to 2.32 million tonnes, up from 1.55 million tonnes last year.

According to the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research), Malaysia palm oil inventory level of 2.32 million tonnes as of end-March is higher than consensus estimate of 2.28 million tonnes.

“Production was stronger than expected as it increased 17 per cent month on month (m-o-m) due to higher production in Sarawak and Peninsular Malaysia,” MIDF Research said.

MPOB’s production of crude palm oil (CPO) for March revealed that Sarawak’s production amounted to 285,704 tonnes — up 22 per cent from the previous month.

While Sarawak saw the strongest growth at 22 per cent on a monthly comparison, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) noted that year-to-date (YTD) production actually softened five per cent as production pulled back slightly from a record year in 2017 at 4.13 million metric tonnes (MT).

Overall, CPO production for March 2018 was at 1.57 million, up 17 per cent m-o-m and eight per cent year on year (y-o-y). This was higher than MIDF Research’s initial estimate of 1.5 million tonnes as the production from Sarawak came in stronger than expected.

“The y-o-y increase of eight per cent is considered a slowdown from January 2018 surge of 24 per cent y-o-y and this could be an indicator that the strong uptrend in production may be over soon.”

Going forward, the research arm expected April production to increase by three per cent m-o-m and only five per cent y-o-y to 1.62 million tonnes.

Kenanga Research expected sequential production growth to continue in April, at seven per cent to 1.68 million MT, close to the previous April production record of 1.69 million MT.

“We estimate supply at 1.73 million MT to exceed demand at 1.68 million MT, for a gradual stock increase of two per cent to 2.38 million MT,” it said.

“Production should continue its uptrend, by seven per cent to 1.68 million MT on the back of continued production recovery in Peninsular Malaysia and Sabah.”

Meanwhile, Kenanga Research noted that exports should weaken seven per cent to 1.46 million MT as Indian demand normalises from the assorted tax adjustments seen in the last month.

“We do not expect strong Indian purchasing to continue, as increased Indian import tariffs (from 30 per cent to 44 per cent) come full effect for the month,” Kenanga Research said.

The research arm believed that restocking activity ahead of the previously expected restoration of Malaysian export tax on April 7 had already taken place, explaining the strong demand seen in the first 10 days of April at 26 per cent to 450,000 MT.

Furthermore, it said that the extension of export duty suspension up to month-end should only have limited impact on demand.

“As such, we anticipate April demand to moderate by seven per cent to 1.46 million MT.”

As for MIDF Research, the research arm projected an improvement of five per cent m-o-m for April exports as the research arm expected demand to remain strong due to pre-stocking activity ahead of Ramadhan.

Price-wise, with slightly higher stocks and weaker demand on the horizon, Kenanga Research anticipated near-term price weakness, although this could be supported by theories of better palm oil demand should China engage in a trade war with the US.

“We are neutral on this possibility as we think the real winner would be Brazillian and Argentinan soy producers rather than palm oil, as a Chinese tariff on soy would result in weaker soybean oil prices (as the commodity is largely traded in the US), which limits the upside potential on palm oil prices even if the demand factor is supportive.”

The research arm maintained its financial year 2018 (FY18) price forecast of RM2,400 per MT but narrowed its short-term CPO trading range to RM2,250 to RM2,500 per MT, from RM2,200 to RM2,500 per MT, with unchanged soybean oil (SBO) discount of US$60 per MT and crude oil premium of US$100 per MT.

“Despite the uptick in crude oil prices raising the price floor, we note that after the recent CPO price pickup to RM2,467 per MT, our trading range now implies higher downside of nine per cent against upside of one per cent.

“We continue to think that policy measures (especially protectionist actions) will be a big demand and price driver for the year, meaning that investors will need to stay nimble to avoid volatility, or select safer options with lower correlation to CPO prices.”

On the other hand, coupled with higher than expected inventory of palm oil, MIDF Research’s 2018 CPO price assumption has been revised to RM2,600 per tonne as US dollar-ringgit rate has weakened nine per cent 3.86 as of April 10, 2018.

“Lower US dollar-ringgit rate usually leads to lower CPO price as it reduces the price competitiveness of CPO against other vegetable oils,” the research arm observed.

“This is especially true for the SBO which is quoted in US dollar.”

Despite the reduction in its CPO price assumption, MIDF Research maintained its positive view on the sector as CPO price has remained strong in US dollar.

The research arm also believed that CPO price should trend upwards in the second quarter of 2018 (2Q18) and the second half of 2018 (2H18) due to improved demand outlook for palm oil.


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