October MPOB statistics were within expectations with stronger exports both m-o-m and cumulatively. Going forward, we expect that production to continue doing well and exports to pick up further towards year end. We do however note that the severity of a La Nina and supply concerns in the soybean market could be re-rating catalysts for the sector. Maintain Neutral.
Production: Up 2.1% m-o-m, 10M11 vs.10M10 up 10.4%
Production for October increased by 2.1% m-o-m while cumulative production is up 10.4% after the La Nina event of last year.
We can expect production to continue strongly as we are in the midst of the peak production period which is typically during 4Q. Full year production is currently on track to break 2009’s high of 17.7m mt, as we expect 2011’s full year production to fall within 18-18.5m mt.
Exports: Up 19.2% m-o-m, 10M11 vs.10M10 up 6.0%
Exports reached record highs in October, mainly driven by Pakistan (up 80.2% m-o-m). We believe this is due to price sensitivities towards the widening price discount between CPO and soybean oil (Figure 9). Exports to EU and US also saw m-o-m increases of 23.5% and 12.1% respectively. On the downside, exports to Egypt shrank 67.1% m-o-m.
While exports to China have been slow possibly due to the harsh winter conditions making CPO storage difficult, we expect exports to rise again towards the end of the year as pre-stocking begins for Chinese New Year in January.
Inventory: Slight decrease of 0.9% m-o-m
The rise in exports coupled with the increase in production has caused inventory levels to remain flat, closing at 2.1m mt.
We expect exports to continue to be strong along with production and that inventory figures will close below 2m mt by year end.
On weather and soybeans
The Southern Oscillation Index (SOI) indicators are currently pointing towards the early stages of a La Nina event as conditions have strengthened slightly over the past fortnight. However, current outlooks suggest that it is likely to be considerably weaker than the event in 2010/11.
The downward revision of US soybean crops together with the risks of a La Nina event hampering South American crops suggest soybean supplies are likely to tighten going forward. Chinese soybean imports are also expected to increase in 2012. This will keep soybean, and in turn CPO prices, strong.
Our CPO ASP is RM3,200/mt for 2011 and RM3,000/mt for 2012.
The adversity of the oncoming La Nina is an event to watch and may be cause for a re-rating catalyst for our CPO ASP in 2012. Besides that, further deterioration of soybean supplies could also take CPO prices higher next year.
By Ecmlibra Research