GE14 result neutral to plantation, M’sian inventory to be better
KUCHING: Whi le the 14th General Elect ion ( GE14) is somewhat neutral to the plantation sector, analysts expect benefits to come in the form of better management of Malaysia’s palm oil inventory under the new government.
According to the research arm of MIDF Amanah Investment Bank Bhd ( MIDF Research), the election result is neutral to plantation sector as crude palm oil (CPO) price is determined by global demand and supply.
On the cost side, MIDF Research believed any cost pressure due to implementation of minimum wage is likely to be neutralised by better CPO price due to better inventory management.
“We expect Malaysia inventory to be better managed under the new government through higher biodiesel usage and increased replanting effort,” it said.
MIDF Research has maintained its positive view on the sector as the research arm expected CPO price to increase to US$ 650 per tonne in the next three months.
The research arm opined that the good global economy growth should lead to higher consumption per capita.
“On the supply side, consensus estimate of huge supply growth may not be fully realised due to ongoing labour shortage and the potentially high replanting activity in Indonesia.
“Recently on May 9, Indonesia has announced its plan to expand its replanting scheme to 185,000 hectares ( ha) of oil palm plantation land this year.
“This could limit the supply surge by between 0.6 million to 0.7 million tonnes assuming oil yield of 3.5 metric tonnes ( MT) per ha.”
Meanwhile, the research arm of Kenanga Investment Bank Bhd ( Kenanga Research) maintained neutral on the plantation sector, with potential for short- term lift given the favourable stock movement, very support ive crude oil prices, and possibility of ringgit weakness in view of the recent election.
“We are cautiously optimistic on plantation stocks’ performance in the near term as a potential safe haven while other sectors may see higher volatility.”
On the April 2018 inventory for oil palm products, which amounted to 2.17 million MT according to the Malaysian Palm Oil Board ( MPOB), the figures had generally come in below analysts’ and consensus’ estimates.
Kenanga Research noted that last month’s stocks of 2.17 million MT came in two per cent below consensus’ expected 2.23 million MT and nine per cent below its 2.38 million MT estimate.
On the other hand, Malaysia palm oil inventory level as of end-April was close to MIDF Research’s estimate of 2.13 million MT but was lower than consensus estimate of 2.24 million MT.
Looking ahead, the research arm expected May inventory to decline two per cent to 2.11 million MT.
MIDF Research expected export to improve two per cent month on month (m- o-m) to 1.57 million MT as the research arm expected demand to remain strong from Northern Hemisphere.
“For production, we expect an increase of 7 per cent m- om to 1.67 million tonnes due to seasonal factor.”
As for Kenanga Research, it anticipated higher supply of 1.75 million MT to be offset by demand of 1.75 million MT, leading May supply to remain f lat at 2.17 million MT.
“Production should continue rising, by nine per cent to 1.7 million MT on normal ised production, while exports should be largely flat (up one per cent) to 1.56 million MT as better China and European Union ( EU) demand offsets softer India and Pakistan purchases.”
Price-wise, the research arm expected the news of stock decline to be favourable to palm oil prices in the near term.
Kenanga Research observed that year to date ( YTD) export demand has been very supportive at 20 per cent, comparing favourably to YTD production growth of nine per cent.
Moving forward, the research arm anticipated production growth to outstrip export demand, especially in the second half of 2018 (2H18), as historically production growth tends to rise higher than export growth towards later months of the year, leading to higher supply, stocks build- up, and a weaker price outlook in 2H18.