CNY worries led to three million MT CPO stockpile
KUCHING: The plantation industry’s February inventory of 3.05 million metric tonnes (MT) has come as a negative surprise to analysts as it exceeded the consensus estimate of 2.95 million MT and Kenanga Investment Bank Bhd’s (Kenanga) estimate of 2.86 million MT.
In a plantation sector report by Kenanga’s research arm (Kenanga Research), it was suggested that the negative deviation was mainly attributed to a sharper- thanexpected drop in exports volume of 21 per cent month-on-month (m-o-m) to 1.32 million MT.
“The drop stemmed largely from exports to China that saw a drop by 75 per cent m-o-m to 80,000 MT, which likely coincided with fewer working days during the Chinese New Year (CNY) month,” explained the report.
The drastic drop from China exports was, however, partly cushioned partly by a remarkable 41 per cent m-o-m increase in Indian demand to a multi-year high, since Sept 2014, to 449,000 MT.
According to Kenanga Research, this was likely due to locals possibly taking advantage of the reduction in import levy from 44 per cent to 40 per cent in January 2019.
Despite the drop of exports to China, Kenanga Research reckons that demand from China will recover sharply after registering a low base during the CNY month. Conversely, exports to India may see some retracements from a high base as the buying frenzy from the lower import tax begins to dissipate.
On the EU front, the research arm expects demand to remain stable given the recent recovery in crude oil prices (CPO), which makes CPO more attractive for feedstock in biofuels.
“Overall, we believe exports volume will improve 10.5 per cent m-o-m to 1.46 million MT in March 2019,” guided the research arm who added they expected and overall demand of 1.78 million MT in the period.
From this demand, the research arm also expects the industry’s supply of 1.45 million MT to fall short of this 1.78 million MT demand, leading to the easing of stocks by 10.6 per cent m-o-m to 2.72 million MT.
Production is expected by the research arm to fall further by 11.3 per cent m-o-m to 1.37 million MT.
“Besides easing inventory, other near-term positives for the sector are: biodiesel initiatives in both Indonesia and Malaysia, reduction of India’s import levy on CPO from 44 per cent to 40 per cent and slowing production in Indonesia as palms take a rest post-bumper harvest.
“Premised on these potential developments, we reiterate our 2019 CPO price forecast of RM2,400 per MT versus the year-to-date average of RM2,048 per MT - representing a 7 per cent increase from RM2,235 per MT in 2018,” the report guided.
While the CPO forecast is promising for the industry, Kenanga Research continues to maintain their ‘Neutral’ call on the Plantation industry as they are there macro uncertainties such as the US-China trade war which will likely continue to hurt the industry’s sentiment and cap further upsides to CPO prices beyond current assumptions.