CPO production uptrend to continue into fourth quarter
KUCHING: The uptrend for Crude Palm Oil (CPO) production is set to continue as analysts reckon the rise in March production rates of 16 per cent month over month (m-o-m) to 1.46 million metric tonnes (MT) are indicative of a post-drought recovery from the El Nino phenomenon.
The observations were made by the teams at Kenanga Investment Bank Bhd (Kenanga Research) and MIDF Amanah Investment Bank Bhd ( MIDF Research) who both noted that March production of 1.46 million MT were within their estimates but above consensus estimates of 1.18 million MT.
Breaking down the improving production rates by regions, Sabah was seen leading the way with a strong 19 per cent increase m-o-m to 386,050 MT, followed by Peninsular with an increase of 17 per cent m-o-m to 774,698 MT and finally Sarawak at a 10 per cent increase m-o-m to 303,273 MT.
Kenanga Research expects this uptrend in all three regions to translate into a solid double-digit year over year (y-o-y) or 9 per cent m-o-m production growth in April to 1.60 million MT.
“With this degree of increase, we think post-drought recovery is starting to show, and producers should achieve good monthly growth numbers up to the traditional production peak in the fourth quarter (4Q),” added the research arm.
Despite these health projected increases, CPO inventory growth is slated to be rather mild with both research arms are expecting April's inventory to increase to around 1.59 or 1.60 million MT, representing a marginal 2 to 2.5 per cent increase m-o-m.
The reason for this is due to consideration of an improving export figures which saw an edge up of three per cent to 1.30 million MT, mostly due to Indian demand strengthening by 28 per cent to 171,000 MT.
“We think this is caused by the widening discount of CPO against soybean oil (SBO) in March to the average of US$112 per MT against February's average of US$99 per MT. This may have caused CPO to gain market share in India which is a price sensitive market,” shared Midf Research who further opined that they expected export growth to reach 5 per cent.
“The increase of SBO prices has made CPO more competitive against it which justifies our 5 per cent growth rate. However, we are limiting it at 5 per cent despite cargo surveyors' data showcasing a 21 per cent surge in export by 21 per cent m-o-m in the first ten days of April because we believe that the surge is only due to a low base effect.
“As such, we expect export growth to taper down for the whole month.”
Meanwhile, Kenanga Research has opted to take an even more conservative stance by projecting export growth rates for April to float around a three per cent increase m-o-m due to offset from a softer demand from European markets which saw a decrease of 12 per cent m-o-m to 135,000 MT.
Recall that the European Parliament has recently adopted a resolution that only environmentally sustainable palm oil can be imported into the European Union after 2020.
The 12 per cent decrease could be attributed to this new resolution as manufacturers looked elsewhere for alternatives to CPO as the 2020 deadline looms closer.
With that said, both analysts are maintaining their ‘Neutral' stance on the plantation sector with an expectation that the higher production and export rates would be offset by a lower CPO price forecast of RM2,550 per MT from Kenanga Research and RM2,752 per MT from MIDF Research.
Top picks for Kenanga Research are IJM Plantations Bhd and United Malacca Bhd due to their above-average growth prospects while Midf Research reckons Kuala Lumpur Kepong Bhd would be a top performer for the sector due to its locked in forward sales of CPO when the price of CPO was higher.