Thursday, May 10, 2007

CPO Inventory Getting Dangerously Low

Inventory level continued to make new multi-year low, falling to its lowest since May ’04 as seasonal increase in production could not keep up with demand. With Indonesia’s production still yet to recover from last year’s draught, we believe inventory level will fall further albeit at a less drastic pace. This will continue to be supportive of CPO prices which in turn will lead to the Plantation Sector maintaining its outperformance over the KLCI. Maintain Overweight on the Plantation Sector with CY07 average CPO price assumption of RM2,150/t.

Production picking up. April production increased by 4.1% m-o-m to 1.125m tonnes, bringing total production to-date to 4.311m tonnes. Compared to April last year, production was down by 14.2%. On cumulative basis, production was 5.1% lower. The lower production was due to slower Peninsular Malaysia production, which was 264k tonnes less than the first 4 months of last year. Sabah’s cumulative production was 1.3% higher but still, output has been down on y-o-y basis for the past 2 months. We believe production will pick up more significantly in the 2H to make up for the current slow production.

Exports up on India and Pakistan. Exports rose to 1.118m tonnes (+5.9% m-o-m) despite slower exports to China (-99.1k tonnes) as this was more than made up by increase in exports to India (+82.1k tonnes) and Pakistan (+48.8k tonnes). On cumulative basis, exports were down by 9.0% to 3.941m tonnes on lower production and higher local usage. The dip in Indonesian production plus the recent imposition of higher exports duty in Indonesia as an attempt to manage cooking oil prices will boost Malaysia’s exports.

Stock level hit another multi-year low. With exports taking up 99.4% of April’s production, stock level fell by 11.7% m-o-m to just 1.181m tonnes, the lowest since May ’04. We believe exports will continue to be robust on the back of strong demand plus supply shortfall from Indonesia. This will help push inventory to below 1.0m tonnes in the not too distant future even without the biodiesel factor.

Strong CPO price performance y-t-d. CPO prices averaged RM2,045 y-t-d based on MPOB prices, which was up by RM622/t or 43.7% from the same period last year. If prices sustain at this level, our average CPO price assumption of RM2,150/t for CY07 will be met by July. We maintain that the ceiling price will be RM2,600/t, which is the price for rapeseed oil. Substitution effect will help close the pricing gap.

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