KUALA LUMPUR: Standard Chartered Global Research expects current bearish events impacting the crude palm oil (CPO) sector to dominate in 2Q2011 but its overall outlook remains bullish.
It said on Wednesday, May 4 CPO prices were facing stiff headwinds. Nearby futures were trading between RM3,250 and RM3,450 a tonne, having slumped around 16% from their high of RM4,000 on Feb 9.
The market has been dragged lower by improving output, mainly in Malaysia but also in Indonesia; sluggish exports to China and India; and lower export taxes in top producer Indonesia. A better soybean crop in Latin America has added to the downside pressure.
'We expect these bearish events to dominate in Q2-2010, but our overall outlook remains bullish,' it said.
Standard Chartered Global Research said data from the Malaysian Palm Oil Board showed a significant improvement in output in March. Production was up 28% on-month and 21% on-month, respectively, in the key states of Sabah and Sarawak, which account for over 40% of Malaysia's output.
Nationwide, output rose 29% on-month in March after declining 20% on-month in January and 5.4% on-month in February. The main reason for the increase in output is the rise in fresh fruit bunch (FFB) yield, which jumped to 1.51 tonner per ha, the highest level since November 2010.
The CPO extraction rate also improved moderately, to 19.67% from 19.62% in February. However it averaged 19.66% in Q1-2011, which compares poorly with the average extraction rate of 20.7% in the same period in 2010.
'We are surprised by this sharp increase in output, even though we anticipated the start of the high-yielding cycle; relatively low extraction rates could limit further output gains.
'A key reason for our continued bullishness on CPO is the expectation of renewed demand from China, which has noticeably withdrawn from world markets in recent months,' it said.
Standard Chartered Global Research said according to trade data, China's CPO imports fell 37% on-month in January and 20% on-month in February. This downtrend in import demand can be attributed to government-imposed price controls on vegetable oils, which have squeezed refinery margins, especially in the case of soybeans.
As a remedial measure, China stepped up the sale of edible oils and oilseeds from state reserves, targeting 3 million tonnes of soybeans and up to 1.5 to 2 million tonnes of rapeseed oil for sale at discounted prices.
According to newswire reports, China has already sold an estimated 1.23 million tonnes'' of rapeseed oil, including 450,000t to designated refineries earlier this year. Reserves were estimated at 2.0 to 3.0 mill tonnes before the start of the sales, so current stocks are likely to be low.
With limited soybean and rapeseed acreage anticipated over the coming season, China may have little choice but to turn to imports. This view is supported by official comments from China indicating the need to replenish declining stocks.
Conversations with traders also suggest that China's CPO demand will be boosted by the onset of warmer weather (CPO solidifies at lower temperatures). Elsewhere, India's CPO demand has also been muted on account of a large rapeseed crop and high oilseed crushing.
'We agree with the view of consultants Oil World that India will need to step up its imports again once domestic oilseed crushings lose momentum and CPO stocks are drawn down,' it said.
'We believe upside risks outweigh downside risks, particularly given the market's failure to capitalise on bearish developments in March and April. Upside momentum will be driven primarily by seasonal demand from China, but also by events in the wider grains markets (corn and soybeans), where we are bullish over the course of the season,' it said.
Standard Chartered Global Research said high energy prices will also provide support for CPO given that CPO is a feedstock for biodiesel. The key risks to our outlook are if CPO output continues to accelerate and demand from China and India remains sidelined.
It said on Wednesday, May 4 CPO prices were facing stiff headwinds. Nearby futures were trading between RM3,250 and RM3,450 a tonne, having slumped around 16% from their high of RM4,000 on Feb 9.
The market has been dragged lower by improving output, mainly in Malaysia but also in Indonesia; sluggish exports to China and India; and lower export taxes in top producer Indonesia. A better soybean crop in Latin America has added to the downside pressure.
'We expect these bearish events to dominate in Q2-2010, but our overall outlook remains bullish,' it said.
Standard Chartered Global Research said data from the Malaysian Palm Oil Board showed a significant improvement in output in March. Production was up 28% on-month and 21% on-month, respectively, in the key states of Sabah and Sarawak, which account for over 40% of Malaysia's output.
Nationwide, output rose 29% on-month in March after declining 20% on-month in January and 5.4% on-month in February. The main reason for the increase in output is the rise in fresh fruit bunch (FFB) yield, which jumped to 1.51 tonner per ha, the highest level since November 2010.
The CPO extraction rate also improved moderately, to 19.67% from 19.62% in February. However it averaged 19.66% in Q1-2011, which compares poorly with the average extraction rate of 20.7% in the same period in 2010.
'We are surprised by this sharp increase in output, even though we anticipated the start of the high-yielding cycle; relatively low extraction rates could limit further output gains.
'A key reason for our continued bullishness on CPO is the expectation of renewed demand from China, which has noticeably withdrawn from world markets in recent months,' it said.
Standard Chartered Global Research said according to trade data, China's CPO imports fell 37% on-month in January and 20% on-month in February. This downtrend in import demand can be attributed to government-imposed price controls on vegetable oils, which have squeezed refinery margins, especially in the case of soybeans.
As a remedial measure, China stepped up the sale of edible oils and oilseeds from state reserves, targeting 3 million tonnes of soybeans and up to 1.5 to 2 million tonnes of rapeseed oil for sale at discounted prices.
According to newswire reports, China has already sold an estimated 1.23 million tonnes'' of rapeseed oil, including 450,000t to designated refineries earlier this year. Reserves were estimated at 2.0 to 3.0 mill tonnes before the start of the sales, so current stocks are likely to be low.
With limited soybean and rapeseed acreage anticipated over the coming season, China may have little choice but to turn to imports. This view is supported by official comments from China indicating the need to replenish declining stocks.
Conversations with traders also suggest that China's CPO demand will be boosted by the onset of warmer weather (CPO solidifies at lower temperatures). Elsewhere, India's CPO demand has also been muted on account of a large rapeseed crop and high oilseed crushing.
'We agree with the view of consultants Oil World that India will need to step up its imports again once domestic oilseed crushings lose momentum and CPO stocks are drawn down,' it said.
'We believe upside risks outweigh downside risks, particularly given the market's failure to capitalise on bearish developments in March and April. Upside momentum will be driven primarily by seasonal demand from China, but also by events in the wider grains markets (corn and soybeans), where we are bullish over the course of the season,' it said.
Standard Chartered Global Research said high energy prices will also provide support for CPO given that CPO is a feedstock for biodiesel. The key risks to our outlook are if CPO output continues to accelerate and demand from China and India remains sidelined.
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