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Friday, March 11, 2016

Regional Plantations - Lowest output in 9 years



Output uncertainties to sustain CPO price

MPOB’s Feb 2016 stockpile at 2.17m MT (-6% MoM, +25% YoY) was a third consecutive MoM decline, aided by the lowest monthly output in 9 years. The weak Feb 2016 output will cap CPO price downside in the short term while further drawdown in stockpile in the coming months will push CPO price higher. 1H16 provides good trading opportunities in anticipation of CPO price staging a mini rally to above MYR2,700/t sometime in 2Q16. Our BUYs in the region are IOI, FR, AALI, LSIP, BAL, SOP and TAH.

Feb 2016 production lowest in 9 years

The Malaysian Palm Oil Board’s (MPOB) Feb 2016 inventory continued its third consecutive MoM decline to 2.17m MT (-6% MoM, +25% YoY). However, it was marginally above street estimates of 2.11m MT. February CPO production of 1.0m MT (-8% MoM, -7% YoY) is at a 9-year low. This was in part seasonal and in part due to the lagged effects of the 2015-16 El Nino which has affected yields. However, the lower output more than offset the seasonally weaker exports at 1.09m MT (-15% MoM, +12% YoY) and weaker domestic consumption at 0.16m MT (-22% MoM, -31% YoY).

Rebound from initial export estimates in March

Initial export estimates for the first 10 days of Mar 2016 by independent cargo surveyors, Intertek and SGS indicated a sharp 31% / 57% MoM increase in Malaysia’s export to 0.33m / 0.31m MT. The sharp rebound was largely due to the low base in the previous month in conjunction with the Chinese New Year festivities. Nonetheless, by our preliminary estimates, Malaysia stockpile could fall further to ~2.03m MT in Mar 2016 assuming production of 1.27m MT (+22% MoM, -15% YoY) and exports of 1.24m MT (+14% MoM, +5% YoY) in March.

Mar-June 2016 output crucial for price direction

The palm oil production for the months of Mar-June 2016 are crucial indicators as the market is anticipating a relatively weak output due to the lagged effect of 2015-16 El Nino. If production turns out weak, we believe there is further upside to the current CPO price and possibly rallying above MYR2,700/t sometime in 2Q16; closing the price gap between soyoil and CPO. Otherwise, CPO price upside will be capped in the near term and on a worst case scenario, come under some pressure.

Position for a trade in 1H16

While maintaining our 12M NEUTRAL view on the sector, we continue to advocate a trading strategy in 1H16 as El Nino offers a situational play. Thereafter, we would turn cautious towards Aug 2016, anticipating sharp CPO price correction in 2H16 in view of seasonally peak CPO production period and end of the El Nino effect. Our BUYs in the region are IOI, FR, AALI, LSIP, BAL, SOP and TAH.


Source: Maybank Research, 11 March 2016

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