Thursday, April 25, 2013

Palm Oil Declines for Third Time in Four Days on Demand Concerns

Palm oil fell for the third time in four sessions on concern that a decrease in shipments from Malaysia, the world’s largest producer after Indonesia, will boost stockpiles as production recovers from a low-output season.
The contract for July delivery lost as much as 0.6 percent to 2,260 ringgit ($740) a metric ton on the Bursa Malaysia Derivatives, before trading at 2,270 ringgit at 11:47 a.m. in Kuala Lumpur.
Exports declined 6.4 percent to 864,206 tons in the first 20 days of April, surveyor Societe Generale de Surveillance said April 22. Production, which is typically low in January and February each year, may increase and boost reserves that dropped to a seven-month low of 2.17 million tons in March as shipments gained for the first time in five months, Malaysian Palm Oil Board data show. Futures lost 23 percent in 2012 when stockpiles rose to a record 2.6 million tons.
“If inventories can’t go to 2 million tons within the first quarter of this year then prices will continue to be pressured,” said Benny Lee, chief market strategist at Jupiter Securities Sdn. in Kuala Lumpur. “Production is going to be up as well in April.”
Soybean oil for July delivery lost 0.3 percent to 48.28 cents a pound on the Chicago Board of Trade and soybeans declined 0.2 percent to $13.5575 a bushel.
Refined palm oil for September delivery retreated 1.2 percent to 5,946 yuan ($962) a ton on the Dalian Commodity Exchange. Soybean oil fell 0.9 percent to 7,346 yuan a ton.
To contact the reporter on this story: Ranjeetha Pakiam in Kuala Lumpur at rpakiam@bloomberg.net
To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

Saturday, April 13, 2013

Palm oil: bearish or bullish?

The palm oil industry is receiving mixed signals from players across the globe. While certain factions are bearish about the industry’s future growth, others are optimistic that it will become bullish going forward.

BizHive Weekly takes a close look at the progress of the industry.

CPO – A mixed bag of contrasting predictions
Amid a season of high production and an environment of tightened capacity, there is a general consensus that 2013 will be a year filled with hurdles for the palm oil industry.
For Malaysia’s most dynamic industry plagued with a backdrop of global economic turmoil affecting international markets the going is an uphill task.Other contributing factors include the uncertainties of the coming general election which is expected to affect on the ringgit, high inventory levels, raised global stockpile estimates for soybean as well as various industry specific factors that are all taking a toll on one of the country’s top economic contributors.
The recent Palm Oil Convention (POC) 2013 held in Kuala Lumpur indicated mixed views from leaders in the palm oil industry.
From government bodies to commodity traders, it was hard to reach a consensus on how the palm oil industry would perform going forth Growing supply from Indonesia due to aggressive expansion, moderate growth of oleo chemical demands as well as subdued demand from bio fuels were factors that painted a bearish cloud over the market.
The Bears

Dorab Mistry, Malaysian commodity trader and director for Godrej International Ltd
Dorab Mistry, Malaysian commodity trader and director for Godrej International Ltd was expecting the price for crude palm oil (CPO) to be rather volatile subsequently turning even more bearish in the second quarter.
“CPO futures prices are not likely to break the RM1,800 ring-git per tonne mark and even the most inefficient oil palm plantation companies producing CPO within the RM1,500 per tonne levels will be able to stay profit-able in these bearish market conditions.”
“Malaysia’s high palm oil stocks will also be drawn down further within the next three months,” he said, adding that July to August would be critical months for the next price direction for CPO, depending on the outcome of the US Department of Agriculture crop estimates.
“This will have a direct impact on the palm-based biodiesel initiatives led by the respective governments.
Last year alone, the world demand for biodiesel shrunk by two million tonnes.”The huge inventory level in Indonesia, China and other consuming regions will continue to pressure oil prices.
Mistry believed that CPO futures prices would range between RM2,300 and RM2,500 till end of April 2013 before declining to RM2,200 or even lower when strong soya exports from Argentina and Brazil kicked in.
He further added that between July and August, the price of the CPO futures might even succumb to bullish US crop estimates just as the palm oil industry entered the peak production period.
Emily French, managing director of Consoli Agra also shared Mistry’s bearish views stating that she believed that the market was now in the early stages of a long term ‘bear market’ for commodities.
This was largely underpinned by the high inventory levels of global vegetable oils particularly soybean, corn and wheat around the world which were likely to see significant production growth this year.
As a result, CPO prices were expected to be weighed down by the overall weaker vegetable oil prices.
Xu Jianfei of Chinatex Grains and Oils Imp & Exp Co Ltd voiced his views on the market dynamics of palm oil demand in China. He noted that palm oil imports from china had been falling since 2006 due to import tariff – the Chinese government’s initiative to support rapeseed prices and higher import of soybean to fulfill the requirement for soybean meal.
However, despite the draw-backs, there were also contrasting views that the market could be bullish this time around based on the assumption that local players would be buying the stock to be converted into biodiesel.
Another factor to be taken into account was the implementation of the Malaysian government’s aim of reaching two million hectares oil palm planted by 2020 according to the Philip Ho, secretary of Sarawak Oil Palm Plantation Owners As-sociation (SOPPOA).
The Bulls

Tan Sri Datuk Dr Yusof Basiron
Tan Sri Datuk Dr Yusof Basiron, chief executive officer of Malaysian Palm Oil Council (MPOC) was more bullish stating that he expected that the CPO stockpile would decline to at least two million tonnes and CPO prices would trade between RM2,500 per tonne and RM3,200 per tonne in 2013.
Meanwhile chairman of the Indonesian Palm Oil Board, Derom Bangun stated that Indonesian palm oil inventory was estimated at 2.
5 million metric tonnes which was sharply lower than market estimates of five million metric tonnes.
He believed global palm oil demand Tan Sri Datuk Dr Yusof Basiron would slightly exceed supply substantiating his rather bullish CPO price outlook which he expected to reach RM2,700 and above.
James Fry, chairman for LMC International was also rather bullish on the industry stating that the correlation between the premium of CPO prices over crude oil prices and inventory levels were negatively correlated.
Fry believed that the current level of CPO prices were already touching floor levels despite the oversupply issue of palm oil given the attractive economics for biodiesel production.
Also, the CPO export taxes in both Malaysia and Indonesia would further depress the prices and enhance the profitability of biodiesel players.
Assuming Brent crude oil price stayed at US$105 per barrel, Fry forecast average CPO price at RM2,625 by mid 2013.
While analysts and industry players maintained their own conclusions on whether it was a Bull or Bear market that was emerging, they all concurred on certain issues that the industry was palgued with.
They listed out issues of persistent problems of labour shortages, potential job cuts and limited milling capacity which would all determine how the market would react going forward.
With Sarawak just emerging as a major player, BizHive Weekly takes a look at the current industry status, the short-term implications as well as the outlook for the palm oil industry in Sarawak.
Enhancing a major engine of growth – Palm Oil Industry

Philip Ho, secretary for SOPPOA
With Malaysia’s palm oil inventory levels hovering at all-time highs, crude palm oil (CPO) prices are expected to remain suppressed in the near future amid strong production, weakened exports and adverse regulatory policy changes from exporters and importers alike moving forward.
This adds a grey cloud over Sarawak as the state has emerged as one of the most dynamic and major contributors to the national palm oil production agenda.
Despite the general bearish sentiments, Philip Ho, secretary for Sarawak Oil Palm Plantation Owners Association (SOPPOA), had a more bullish forecast for the local industry. “In general, based on reports from various commodity traders at the recent Palm Oil Conference (POC) 2013 held in Kuala Lumpur, the prices for palm oil is expected to recover later this year to the RM2,500 to RM2,700 range.”
“Add on the government’s aim of reaching two million hectares oil palm planted by 2020 means that there is a positive note from the government regarding the future for palm oil.”
To further add to his positive sentiment, Ho stated that, “The better outlook later this year stems from the demand in the northern hemisphere consuming countries in the coming warmer months ahead while government policies like the biodiesel B5 and B10 will also assist to lower the current high domestic inventory.”
Ho was not too concerned about the global view as he noted that there were issues closer to home that needed to be addressed. He added that the issue in Sarawak’s palm oil industry however, did not stem from external factors but localised issues such as labour shortages, minimum wage issues and foreign workers.
He explained that in terms of production, according to statistics by the Malaysian Palm Oil Board (MPOB), Sarawakian oil extraction rates (OER) were marginally higher than those from West Malaysia of an average of two per cent to three per cent.
“Generally higher OER results in higher earnings as more oil is being extracted which contributes to the total output and so higher volume for sale. It has been widely seen in the industry that planting oil palm in peat soil generally results in higher productivity which translates to higher OER which has been substantiated by MPOB,” Ho elaborated.
But despite the high production and bullish views from SOPPOA, the Sarawakian oil palm planters were currently operating at only 80 per cent capacity, as labour had always been an issue in this sector.

Sarawak’s labour department statistics showed that as of June 30, 2012 there were 98,092 persons working in oil palm plantations, out of this 80 per cent were Indonesians.
As the industry in Indonesia is expanding very rapidly, it has become increasingly more difficult to get additional workers from that country.
Thus, the state government is considering other source countries for the recruitment of workers to ease the shortage, but this is seen as a short-term solution.
Another factor Ho added was that effective January 1, employers were required to pay a minimum wage of RM900 a month in Peninsular Malaysia and RM800 a month in Sabah, Sarawak and Labuan.
According to him this meant the basic wage in Sarawak had gone up from RM18 per day to RM31 per day for a worket with plantation owners bearing the brunt of the cost. With international investors still rather wary due to the mixed predictions on the sector, it was making it even more difficult in Malaysia’s most ‘governed’ industry.
Taking into account the expenditures involved in the startup, a median profit that would only be seen after seven years, it would make life even more difficult for plantation owners to survive in the industry.
Ho explained that contrary to popular belief, the industry did not make enormous profits and being the only agricultural crop which was taxed before profit as millers, exporters of palm oil were taxed whenever the commodity was sold.
Tax categories included, ‘Windfall Tax, stabilisation fund, export duty tax and a further 25 per cent corporate profit tax ‘ that was levied on companies involved in the industry.
“We are grateful though that the government has now deferred the Foreign Workers levy to be paid by the workers and also exempted the estates from the Foreign Workers Helath Insurance Protection Scheme (SPIKPA)”
Coupled with the new minimum wage issue in an industry that is largely dominated by foreign labour it adds salt to the wound. One of the main issues is the disparity between foreign workers and the locals.
“To paint a clearer picture, a Malaysian worker gets the same basic wage of RM800, but the foreign worker enjoys free housing, water, electricity and transport. So, for the same minimum wage, a local gets less benefits,” Ho explained.
Historically employers from the plantation sector have provided free housing, water, electricity and healthcare for its workers at the estates but locals preferred to stay with their families.
In view of the minimum wage law coming into force, planters have appealed for these subsidies be included in the minimum wage to rebalance the interests of local workers.
Another issue Ho stated was the milling capacity as according to him, interested parties that wanted to open a mill needed to fulfill certain terms and conditions before being allowed to own a mill.
According to an analyst, CPO production growth in Sarawak would continue to outpace that of the country in 2013 due to its relatively late commercial planting initiative (hence, younger trees), exacerbating the mismatch in production and refining capacity.
He noted that, “So far, Sarawak has five refineries with a total capacity to process 2.4 million tonnes of CPO annually.
“Production within the state topped 2.9 million tonnes in 2012.” The analyst went on to note that similar issues were occurring at the milling level as the state government hoped to prevent the milling overcapacity situation seen in Peninsular Malaysia and Sabah.
“No independent millers are thus allowed in Sarawak, with each company needing to operate at least 5,000 hectares (ha) of planted area before being given a licence to construct a CPO mill.”
“While the mill would be sufficient to accommodate its own fresh fruit bunch (FFB) and some external crops, severe underestimation of FFB production from smallholders within the state (those with less than 5,000 ha planted area) is causing shortages in milling capacity.”
Meanwhile, the analyst noted that oil palm planted land was currently going at a cheaper price amid soft CPO prices.
“Asking prices for planted oil palm estates in Sarawak have come off its peak recently amid weak CPO prices. A planted peat area previously calling for RM60,000 per ha is now available at RM45,000 per ha.
“Unplanted agricultural land prices, in contrast, have risen to RM12,000 per ha from the RM7,000 to RM10,000 per ha seen when CPO prices breached RM4,000 per tonne mark in early 2008.”

At the moment it is unclear how all these factors will impact the outcome as Sarawak is fast becoming a major player in the palm oil industry (1.21 million ha as of June 2012).
However, despite these issues, Ho still retained his bullish views on the industry and added that, he believed that not only would the demand still be there, industry players and bodies were even investing more into it.
“MPOB and other organisations have continuously looked into greater mechanisation of the industry with lots of research activities in many different aspects of the estates’ operations.
“The canter cutting machine is a good example of the contribution from the reserarch done and many estates are also employing their own mechanisation means wherever possible as these will save time and add to the productivity of the estates,” Ho enthused.
With new major players not only surviving but thriving in this environment while only working at 80 per cent capacity, it will boil down to the policy makers on how to take advantage of Sarawak’s palm oil muscle to further boost an industry that is a major contributor to the national gross domestic product.
CPO: Inviting the Bull or Bear?
With mixed views from the international community, a bullish Sarawakian perspective and taking into consideration the various issues in the industry, the success of the industry in the local context lies with its performance throughout the country.
MIDF Amanah Investment Bank’s research wing (MIDF Research) noted that the total crude palm oil (CPO) production in February dropped by 19.2 per cent month on month (m-o-m) in February to 1.30 million metric tonnes (mmt).
It justified that February had always been the weakest month for production as the January to April period was associated with low production cycle for CPO.
The decline in production in February was attributable to lower fresh fruit bunch (FFB) yield of 1.34 metric tonnes per hectare as compared with 1.62 metric tonnes per hectare in January 2013.
Exports in February were also beset by seasonal factors, falling 14 per cent m-o-m. However, it surprisingly increased by 15.4 per cent year on year (y-o-y) to 1.40 mmt, mainly due to higher offtake from the US. For the cumulative period of January-February, exports were already higher by 16.4 per cent.
Based on the figures, if demand factors are at least maintained, it will not be surprising if exports grow by more than 15 per cent this year further backing the bullish view.
This will surpass the 12 per cent growth registered in 2008, which was the best year for exports in six years. Total exports to China declined 11.7 per cent m-o-m and declined 21.7 per cent y-o-y in February.
China is still holding a high level of inventory and the current winter season is also a dampener on demand. However, exports to other major palm oil countries are improving. On yearly basis, export to India, the European Union and US rose 74.4 per cent, 105.8 per cent and 124.1 per cent respectively.
Touching on the inventory levels, the closing stock in February 2012 declined by 5.2 per cent m-o-m to 2.44 mmt. The lower output in February helped inventory to decline, hence supporting CPO prices.
Despite a reduction in the inventory, stock usage ratio continued to climb to 13.36 per cent, the highest since December 2009. However, the stock usage ratio is expected to decline between 11 per cent and 12 per cent in the coming months as exports are believed to be stronger.
As the monsoon season which disrupts the harvesting and collecting activities is reaching its end, it is expected that CPO production will increase. For 2013, CPO production in Malaysia is expected to increase to 19.08 mmt attributable to the increasing oil palm matured areas and the introduction of oil palm replanting schemes with the allocation of RM100 million.
Industry sources opined that another noteable issue was that after enjoying two months of tax free privileges on CPO exports, the government announced that it would tax CPO export at 4.5 per cent in March.
Even though there was an increase in the export tax rate, there were mixed views on the effect of this change sources added.
MIDF expected the export of total CPO and refined palm products to continue to gain traction justifying that the current tax structure enhanced the competitiveness of Malaysian palm oil products and put Malaysia on a level playing field.
With the current Indonesia CPO export tax of nine per cent, it believed Malaysian producers were able to capture larger market share compared with that in 2012.
With regard to this scenario, the research house believed that the export of CPO from Malaysia would increase compared with exports in 2012.
According to Bloomberg statistics exports might decline further as a tax on shipments curbed demand among importers.
The contract for May delivery lost as much as 1.5 per cent to RM2,413 per metric tonne on the Malaysia Derivatices Exchange with futures losing 27 per cent in the past year on rising global oilseed supplies and slowing demand.
It was reported that exports fell 14 per cent to 1.4 million tonnes in February for a fourth monthly drop, according to the Malaysia Palm Oil Board (MPOB). The duty for March was pegged at 4.5 per cent after a zero rate in the first two months as the base price in those two months was below the threshold that triggered the minimum tax.
But in general, the rest of the country shared similar sentiments to that of Sarawakian players with Malaysian Plantation Industries and Commodities Minister, Tan Sri Bernard Dompok, stating his optimism on bullish prices on the improving economic conditions.
The government has announced futher plans to encourage growers to remove 25-year-old trees that yield less oil on 300,000 ha and replant them.
According to media sources, Dompok stated that, “Trees on 100,000 ha may be cut down and replaced this year lowering output by 400,000 metric tonnes and helping cap inventory levels.”

He was banking on the economic recovery to boost rates and substantiated that when there was strong demand from India, China and Pakistan, the price should go up.

At the moment it is hard to determine how the industry will perform with many factors still unknown. Nationally, the sentiments seem positive, internationally there are mixed signals but with the current growth rate, an expected increase in demand, a recovering global economy, analysts and industry sources are reckoning that the bull may be able to hold the bear back.


Read more: http://www.theborneopost.com/2013/03/17/palm-oil-bearish-or-bullish/#ixzz2QPieMIii

Read more: http://www.theborneopost.com/2013/03/17/palm-oil-bearish-or-bullish/#ixzz2QPiNtyTn

Friday, April 5, 2013

12 Months After Field Planting

AAR Oil Palm after 12 months of field planting.