by BPS :
• Palm oil price has slumped over the year
Historically the price movement of palm oil and its close substitute, soy oil showed similar pattern. However, by the end of third quarter of 2012, the global palm oil price had reduced by 14%, while soy oil was relatively better, up 1% year on year (See Figure 1). Palm oil and soy oil are the two largest consumed edible oils, accounting for around 60% of major edible oil consumption (US Department of Agriculture/USDA, 2012).
• Bumpy year for CPO based stocks
As crisis in Euro zone lingers and global economy turns slower, CPO based stocks are in peril of weak demand. Up until first half of this year, companies reported a drop in their net income growth. With production flat, costs edged higher and average selling price moved downward, future gain in CPO stocks look dim to investors. (Figure 2).
• Demand is expected to climb back in the long run
Indonesian CPO export has been decreasing since 2009, while domestic consumption remains strong (Figure 3 and 4). Annually, production grow more than 5% as world demand of the commodity is estimated to outstrip supply in the long term (Figure 5 and 6). India as the major destination, with forecast GDP steady around 6%, is expected to balance the diminishing demand from Euro zone (Figure 7 and 8).
• Currently-high inventory is likely to turn around
Historically, production were climbing from the beginning of the year, and reached its peak at third quarter of the year (Figure 9). During September to October, Malaysia, the no. 2 largest CPO producer, recorded the highest level of inventory (Figure 10). This caused downslide in global palm oil price (Figure 11). However, inventory is estimated to decrease towards end of year, as production becomes limited.
• Malaysian CPO export taxes cut gives impact
Malaysia will scrap the tax free quota for the crude grade from 2013 and impose a cut in CPO export taxes to 4.5% - 8.5% starting 1 January 2013.
The move could reduce feedstock prices for Malaysian refiners and boost exports. Indonesian CPO producers should face strong competition for demand from overseas refiners next year. Malaysia also intends to adopt Indonesian model in setting monthly export tax for CPO. Last September, Indonesia has cut its tax exports to 13.5% from 15% in August.
• Long term view is bullish for CPO based stocks
We recommend BUY for AALI, BWPT, LSIP, and SGRO. The companies possess strong domestic sales and we believe that in Q4, rise in selling price and better demand will shrug off the current sluggish trend.