Plantation - Inventories Fall Most In 2 Years

alm oil inventories continued to fall in March, hitting its lowest levels in 7 months at 2.1m mt, down from 2.4m mt last month. The 11% m-o-m fall, which is higher than market expectations, is also the biggest drop since early 2011. Judging by the current momentum, we may see an early return of inventories to the psychological and steadier level of 2m mt probably in April, which could subsequently help improve CPO prices. Meanwhile, March 2013’s average CPO prices stood at RM2,349/mt compared to Feb’s RM2,373/mt, far below March 2012’s average of RM3,315/mt however. We are maintaining our CY13 and CY14 average CPO prices of RM2,750/mt and RM2,850/mt respectively.
Inventories decline further. Inventories fell the most in 2 years, down 11%. Meanwhile, stock/usage ratio registered its first drop since Oct last year, down from 13.2% in Feb to 10.8% last month, attributable to the good demand from China despite seeing a slight recovery in production.
Strong demand from China. Palm oil exports improved by 10.1% and 15.8% m-o-m and y-o-y respectively. Lower m-o-m demand from EU (-37.5%), India (-65.8%), Pakistan (-19.6%) and US (-21.3%) were offset by strong orders from China (+76.7%) and other nations (+38.4%). We believe China has started replenishing its stock after the recent festive periods.
Recovering from low-cycle period. Both Peninsular Malaysia and East Malaysia recovered from the low-cycle period by registering 2.7% and 1.6% growths in production respectively.
Positive growth in the beginning of April exports. According to independent market surveyor Intertek, the first 10 days of April exports have shown positive growth of 3.5% compared to the same period of March.
Maintaining price outlook. We maintain our RM2,750/mt average CPO price forecast for 2013 and RM2,850/mt for 2014. Currently, we have neutral calls for the sector as well as all the plantation companies under our coverage. We believe recent negative newsflows have been fully factored-in, hence, we are unlikely to see further downside surprises for the plantation companies under our coverage. Re-rating catalysts could come in the form of an earlierthan- anticipated inventory reduction and stronger export growth.