Palm oil production rebounds strongly in March

Malaysian Palm Oil Board (MPOB) released statistics on Thursday that showed crude palm oil (CPO) production rebounded strongly in the month of March.

CPO production surged to 1.49mmt (million metric tonne) in March, up 17.3 percent m-o-m (month-on-month) and +13 percent y-o-y (year-on-year).

However, external demand was weak as total palm oil exports fell by 0.8 percent m-o-m and 19.1 percent y-o-y to 1.24 mmt.

Despite weaker production and falling exports, inventory remained low at 1.69 mmt.

Head of research of Inter Pacific Securities Sdn Bhd, Pong Teng Siew said that inventory levels were one of the key determinants of the direction of CPO prices.

“We see inventory levels to increase towards the second quarter of the year and our average CPO price target for the year is RM2,650 per metric tonne,” said Pong.

When asked about the erratic weather conditions that have been experienced of late, Pong said that he was of the opinion that judging from production levels, CPO output was not affected.

Bank Islam Securities in a research note said Thursday, CPO production for the month of March came in above expectation, rising +17.3 percent m-o-m.

The commendable growth was recorded amid the current dry spell. The main contributor to the growth was the sharp increase in CPO production growth in Sarawak, where CPO production grew 30.8 percent y-o-y, the highest growth recorded in Sarawak since May 2011.

According to Bank Islam Securities, CPO production is normally lower in the first quarter of the year due to the northeast monsoon season.

There has been a drop in exports for the fifth consecutive month. Total exports in March declined -8.0 percent m-o-m and 19.1 percent y-o-y to to 1.24 mmt, its lowest since February 2011.

For the cumulative January to March, total exports of CPO was 3.96 mmt, 13.1 percent lower on a y-o-y basis. This was mainly due to lower offtake from China and the USA, which fell by 18.6 percent y-o-y and 38.8 percent y-o-y respectively.

However, purchases from the EU countries and India have shown some improvement. In 1Q14, palm oil export to EU countries and India increased by 9.2 percent y-o-y and 16.9 percent y-o-y each.

Similar to production, export of palm oil also exhibit a seasonal pattern. In the past few years, exports had generally been lower during November to March, but rebounded significantly in the months that followed.

If the same trend were to persist, total palm oil exports are expected to improve in April onwards. Inventory remained at a comfortable level. Despite sluggish export and higher CPO production, palm oil inventory in March increased by only by 1.9 percent to 1.69 mmt.

According to Bank Islam Securities, at this current level, inventory is deemed supportive of price. The favourable inventory level is partly contributed by the increase in local consumption, which can be reflected by the increase in the utilization rate of FFB (Fresh Fruit Bunch) mills and refineries.

Guidance by the United Stated Department of Agriculture (USDA) has indicated that global soybean production in April is projected to decline slightly to 284 million tons, down 1.4 million from last month.

This was mainly due to the expectation of lower soybean production in Brazil, which is one of the major world soybean producers.

USDA has forecast Brazil’s soybean production in April to be 87.5 million tons, down 1 million from that in March.

Bank Islam Securities is positive on the plantation sector on the expectation of of lower soybean supply which has driven soybean prices higher and widened the discount of palm oil to soybean.

Currently, CPO price is 13.8 percent lower than soybean price (the discount in value term is USD131pmt). If the discount continues to widen, this will help CPO price to sustain above the current level as buyers will prefer more palm oil due to its price attractiveness.

Bank Islam Securities average target price for CPO for 2014 is RM2,700 pmt.