Posted on November 12, 2011, SaturdayKUCHING: Supply growth for palm oil is set to continue its strength, driven by encouraging weather conditions and continuous increase in yield from young trees and newly mature areas in Indonesia.
Most of the bigger players in Indonesia had experienced the peak of their plantations in 2007 and this, according to market observers, would help beef up the palm oil’s volume going forward.
“These newly mature areas will continue to accelerate their production growth for the next four to five years. As such, we believe supply will trend upwards as we move into the new year.
“We suspect Indonesia’s palm oil production to peak around 2015 given the historical planting and that most companies have not been able to meet their planting target since 2008. This has been made worse by the moratorium on new planting put in place this year,” said OSK Research Sdn Bhd (OSK Research) in yesterday’s note.
Of all global edible oils, the only major oil that had seen an accelerated increase in output was palm oil, which growth was mainly derived from Indonesia.
Hence, the research house affirmed that should Indonesia’s palm oil production hit a peak, global edible oil supply would follow suit with a peak, where this would consequently have very bullish price implications.
“While it is too early to position for the next upcycle, we believe investors should accumulate good growth stocks which will provide the alpha as these stocks tend to be illiquid,” OSK Research added.
Groups like First Resources Ltd, Sarawak Oil Palms Bhd and Kencana Agri Ltd were amongst the research firm’s top picks as they had age profile capable of driving long-term output growth.
According to Malaysia Palm Oil Board (MPOB), the country had produced 1.908 million tonnes of palm oil in October this year, higher by 2.1 per cent or 39,2000 tonnes compared with the previous month. The month’s volume was the country’s second highest monthly production, after October 2009.
Much of the growth came from East Malaysia, whereby Sarawak and Sabah’s production rose by 3.4 per cent and 3.9 per cent month-on-month (m-o-m), respectively. Peninsular Malaysia, on the other hand, saw a marginal increase of 0.8 per cent in production.
On a year-on-year (y-o-y) basis, national yield swelled 16.6 per cent, propelling year-to-date (YTD) production to 15,790 million tonnes, 10.4 per cent stronger than over the same period last year.
Meanwhile, analysts from ECM Libra Research Sdn Bhd (ECM Libra Research) expected that the full-year production would fall within 18 million metric tonne (mt) to 18.5 million mt, breaking the 2009 high of 17.7 million mt.
On the other hand, RHB Research Institute Sdn Bhd (RHB Research) took a more conservative view on the matter despite optimism expressed on future outputs.
“We believe the continued strength in production numbers in October may indicate that monthly production in the country may not necessarily grow from hereon for the rest of the year,” it said.
The tropical Pacific Ocean has been in the early stages of a late-forming La Nina event. Weather models suggested that a further strengthening of the event was likely until mid-first quarter of next year. Key atmospheric signals such as trade winds, cloud and the Southern Oscillation Index (SOI) had also exceeded La Niña thresholds of plus eight.
“If the SOI is sustained above these levels for more than three months, it would indicate a confirmation of La Nina. However, we reiterate that this time, if La Nina does form, it is likely to be weaker than the strong 2010 to 2011 event,” opined RHB Research.
Moving ahead, national exports also experienced a surge of 19 per cent, or 294,400 tonnes m-o-m, after two consecutive monthly declines. Pakistan contributed to the stronger exports, boosting its monthly purchase by 88,000 tonnes. This was followed by Italy (63,100 tonnes), Bangladesh (13,000 tonnes) and India (8,100 tonnes).
Exports climbed 26 per cent on a y-o-y basis on the back of higher Chinese and Indian purchases. Current YTD exports registered a total of 14,723 million tonnes, which was 6.2 per cent stronger than the previous year.
The high export numbers as opined by Kenanga Research, the research arm of Kenanga Investment Bank Bhd, could be due to stock-up activities then ahead of preparation for Hari Raya Haji celebration in Pakistan. This along with the declining domestic production of rapeseed in Europe helped to escalate the demand in palm oil products.
Taking into account of the major festivities that spurred the demand for palm oil, Kenanga Research was somewhat downbeat of the current period as there would be less celebrated events this quarter.
“In the absence of major festivals going forward in the fourth quarter of this year, palm oil demand may decline within the short-term span. In addition, crude palm oil (CPO) demand usually falls in the northern hemisphere during winter as consumers switch to soybean oil, which does not solidify in colder temperatures,” it said.
Following this line of observation was OSK Research, who believed that demand would not see much excitement due to uncertain economic condition.
“YTD China’s edible oil import has fallen by 7.9 per cent while India’s by seven per cent. India’s palm oil purchase bucked the trend with a 3.1 per cent increase indicating a switch to palm oil due to the sizeable discount to soybean oil.
“However, the spread has narrowed from more than US$250 just a month ago to less than US$150 now with the successful soybean harvest in the US. Should the spread narrow further, India’s buying of palm oil will certainly weaken,” said OSK Research.