The markets were subject to two major announcements on the last day of the week.

 

MPOB and USDA nos for July

 

Below is the comparison of various surveys and the actual nos for Palm production in July.

Inventory increased 1.3% mom in Jul 18. Malaysia’s palm oil inventory increased marginally to 2.21m tonnes in Jul 18, which was below than market’s expectations of 2.27m-2.47m tonnes. The lower-than-expected inventory level was due to stronger-than-expected exports.  
·     CPO production improved mom, but significantly weaker yoy. CPO production registered a yoy decline of 17.7% in Jul 18, which is the third consecutive month of yoy decline since Apr 18. Jul 18’s CPO production of 1.50m tonnes was lower than Jul 16’s and Jul 15’s of 1.59m tonnes and 1.82m tonnes respectively. The weak CPO production in Jul 18 was unusual as the impact from severe drought in 2015-16 should have fully faded. The key factors leading to the weak CPO production could be worker shortage and the lack of FFB from trees that are ready for harvesting.  

·     Exports improved marginally. Exports for Jul 18 was 1.21m tonnes (+6.8% mom) According to Intertek Testing Services, exports rose 6.6% mom to 300,326 tonnes during 1-10 Aug 18. We are expecting exports to continue increasing in Aug-Sep 18 on the back of festive demand from India and increasing demand from China due to the Golden Week in October.  

The Malaysian Palm Oil Board (MPOB) has cut its 2018 CPO production forecast by 2.9% to 19.9m tonnes (flat yoy) from January’s prediction of 20.5m tonnes. The downward adjustment of CPO production forecast could be due to: a) manpower shortage affecting the harvesting activity, and b) lack of FFB from trees that are ready for harvesting. · Expect mom production increase in Aug 18. Based on reports available, during the first few days of harvesting in Aug 17, production showed single-digit mom growth. The peak production will be sighted most probably during Oct-Nov 18. Should Aug 18 CPO production still come in weak, there is a possibility of Malaysia’s CPO production coming in below the revised CPO production forecast of 19.9m tonnes. This will be positive to CPO price movements and inventory will not pile up. · FFB yield still below five-year range. The national FFB yield of 1.29 tonnes/ha in Jul 18 was lower than the five-year average of 1.56 tonnes/ha and the five-year low of 1.52 tonnes/ha. Peninsular Malaysia’s FFB yield decreased 17% yoy to 1.29 tonnes/ha from 1.55 tonnes/ha in Jul 17, while Sabah/Sarawak’s FFB yield fell to 1.28 tonnes/ha (-24% yoy). · Increasing biodiesel exports demand could support CPO price. The increase in gasoil price has affected diesel and biodiesel demand. Currently, gasoil price is at a premium to CPO price, which has made biodiesel programme more economically viable. It is gather that discretionary biodiesel demand has been increasing. For Jul 18, biodiesel exports increased 59% mom and 31% yoy.

 

Indonesia: More enigmatic situation remains of Indonesia. We gathered that some of the plantations reported +ve growth in June even though Eid holidays took almost 9 days of the activity. July production was estimated to be over 23%, of course August production is expected to be relatively lower than growth seen in July. Will gather more and share in the next update for Indonesia.  

 

USDA WASDE showed US farmers are set to har-vest a bumper soybean crops with yields at almost the highest ever. Soy crop was forecast at 4.586 billion bushels, higher than the expectation of 4.425 billion and against the 4.310 billion in July.

Yield was set at 51.6 bushels per acre, up from 48.5 in July. US soybean stockpiles in 2018-19 may climb to 785 million bushels, beating forecast of 648 million and the 580 million in July report.

Meanwhile world soybean stockpiles are pegged at 105.9 million tons, higher than the expectation of 99.5 million and 98.3 of July forecast.

 

Malaysian Export duty: Meanwhile, this morning Malaysian Government announced that September there will be zero duty on CPO as compared to 4.5% in August. This will directly impact the Malaysian stocks. However in the 2nd session of the market didn’t show any excitement as inherent fears of Indonesian pressure prevailed over the sentiment.

 

Currency: USD continued to spread its strength across the board, the Indian Rupee traded all time low at 69.61 before bouncing off a bit. Turkish Lira made news EUR has broken down significantly below its 1.15 resistance level and currently has a 1.13 handle. According to some analysts the perfect storm of an international USD shortage, a sucking of USD into US treasuries, high levels of international USD debt that needs to be serviced or repaid and a risk off environment would suggest that the USD strength has a long way to go from here with all the down side that will bring to emerging markets.

 

What ahead: The market may see some spikes that should be taken as opportunity to maximise your sells while look for dips to cover back

 


 

 

Today’s market watch, we have taken critical inputs from Oil World as well as other reports.

 

Highlights of POTS 2018 in KL last week

Palm oil futures had showed steady streak, however it reversed gains as influential analyst Dorab Mistry cautioned that Malaysian inventories could set their highest in at least a decade, despite the prospect of waning production hopes. Mr Mistry, a director at Indian consumer goods company Godrej International, forecast the Malaysia’s palm oil stocks “can rise to between 3-3.3m tonnes” by the end of December. That would be the highest figure on readily available data from the Malaysian Palm Oil Board going back to 2007, with the highest stocks figure since then the 2.91m tonnes set in November 2015, during an inventory build which saw Kuala Lumpur futures touch their lowest levels since 2009. Whether Malaysia’s inventories indeed reached such lofty levels would “depend on how quickly palm oil prices are allowed to drop”, Mr Mistry said, with weaker values boosting demand and so tending to stem stockpiling. At current exchange rates, palm oil prices as measured by Kuala Lumpur futures “need to drop to 2,100 ringgit to make palm competitive and to regain exports”, he told a key industry conference in Malaysia. Malaysia’s palm oil exports, after a bright start to 2018 spurred by the temporary shelving of levies on shipments, have shown marked deterioration since the tax was reimposed in May, dropping 15.4% year on year in the May-to-July period. Malaysia two weeks ago revealed that it would in September return the export levy to zero. Still, Mr Dorab added that India, the top edible oil importer, was “unlikely in the short term” to reverse its own hikes on import taxes, increases aimed at boosting domestic farmers, which are expected to cut the country’s purchases of palm oil to a six-year low.

The caution for a potential spurt in Malaysian palm oil stocks, which stood at 2.21m tonnes last month according to the Malaysian Palm Oil Board (MPOB), came despite a reduced forecast for the country’s production. Mr Mistry pegged output at 19.2m-19.5m tonnes, down from a forecast in March of 20.5m tonnes, and reflecting what he termed a “sad commentary” on the Malaysian industry, which produced 19.92m tonnes last year on MPOB data. James Fry, chairman of UK-based consultancy LMC International, on Tuesday estimated Malaysia’s output falling by some 200,000 tonnes this year, with Oil World’s Thomas Mielke downgrading his production forecast to 19.8m tonnes, in comments which were better received by investors.  

Figure 1: CPO prices forecasts

Speakers

2H18

James Fry

RM2,200

Thomas Mielke

RM2,100-RM2,500/tonne

 

Indonesia's 2018 crude palm oil output to climb to 40-42 mln T -industry body. Indonesia’s 2018 crude palm oil output is set to climb by 4-6 million tonnes from last year to 40-42 million tonnes, said an official from an industry association. “Output will be better this year ... because of replanting seen in the private sector, which will give better yields,” Togar Sitanggang, vice chairman of the Indonesian Palm Oil Association (GAPKI), said on the sidelines of an industry conference in Kuala Lumpur. He added that the output gains would push up year-end stocks unless exports pick up. Indonesia is the world’s largest producer and exporter of palm oil, the most widely used edible oil in the world found in everything from margarine and cookies to soap. Palm oil output usually rises in line with seasonal factors towards the third and fourth quarter of the year. (Source: Reuters)

 

Indonesia: Indonesia’s palm oil exports rise 27% yoy to 3.22m tons in July. Exports increased from 2.54m tons a year ago, according to Indonesian Palm Oil Association, known as Gapki. Exports in July 2018 the highest throughout this year. Rise in exports supported by low prices and shipments to India.        Shipments to India in July recorded at 652,730 tons, the highest this year. Exports to China at 350,120 tons in July. China shows higher interests in Indonesia’s biodiesel, imported 210,000 tons in July compared to 185,000 tons in June. Output in July 2018 seen at 4.28m tons, the highest monthly production since 2015. High production supported by favorable weather and increasing mature plantation area. Stockpiles seen at 4.9m tons in July. Govt’s B20 biodiesel mandate seen driving crude palm oil prices higher as it will reduce supplies to global market.        Exports of palm and kernel oils at 2.81m tons in July. (Source: Bloomberg)

Figure 1: Indonesia production statistics

(‘000 tonnes)

Apr-18

May-18

Jun-18

Jul-18

mom % chg

Opening stock

3,650

3,975

4,755

4,845

1.9

Production

3,718

4,243

3,949

4,284

8.5

Export (CPO, Lauric Oil & Biodiesel)

2,394

2,333

2,732

3,219

17.8

Domestic Consumption

977

1,130

1,126

1,010

(10.3)

Ending stock

3,975

4,755

4,845

4,901

1.2

Source: GAPKI, MPOB

Figure 2: Indonesia & Malaysia production statistics

(‘000 tonnes)

Apr-18

May-18

Jun-18

Jul-18

mom % chg

Opening stock

6,283

6,485

7,249

7,314

0.9

Production

5,465

5,948

5,438

5,963

9.6

Import

36

32

86

44

(48.7)

Export (CPO, Lauric Oil & Biodiesel)

4,036

3,728

3,976

4,566

14.8

Domestic Consumption

1,249

1,487

1,475

1,388

(6.3)

Ending stock

6,477

7,249

7,321

7,369

0.7

Source: GAPKI, MPOB

Figure 3: Indonesia palm and palm kernel oil exports

(‘000 tonnes)

Jul-18

mom % chg

yoy % chg

7M18

yoy % chg

Palm & Kernel oil

2,806

22.3

16.7

16,971

(2.7)

  Palm oil

2,601

22.2

15.4

15,711

(3.9)

  Palm kernel oil

206

22.7

36.0

1,260

14.9

By Destinations

         

China

350

6.0

109.3

2,174

31.9

EU

423

(4.6)

21.9

2,812

(8.1)

India

653

39.5

(0.0)

3,156

(28.7)

Pakistan

171

(20.5)

(17.1)

1,297

3.0

US

71

(11.5)

(16.5)

682

8.7

Others

1,138

50.2

20.4

6,850

6.6

Source: GAPKI, MPOB

Figure 4: Indonesia & Malaysia palm and palm kernel oil exports

(‘000 tonnes)

Jul-18

mom % chg

yoy % chg

7M18

yoy % chg

Palm & Kernel oil

4,087

16.8

5.2

27,062

(0.4)

  Palm oil

3,806

16.9

4.2

25,260

(1.3)

  Palm kernel oil

280

16.4

20.7

1,802

13.4

By Destinations

         

China

477

(4.6)

29.1

3,240

24.9

EU

594

(0.7)

0.6

4,151

(4.0)

India

792

25.8

(3.4)

4,786

(16.7)

Pakistan

250

(20.6)

(12.6)

2,021

13.6

US

108

(18.4)

(23.8)

1,034

6.4

Others

1,866

41.0

11.3

11,829

0.7

Source: GAPKI, MPOB

As per analysts

·        Indonesian and Malaysian inventory level was 7.4m tonnes in Jul 18. For Jul 18, Indonesia and Malaysia inventory increased marginally mom to 7.4m tonnes (+0.7% mom). The increase in inventory mainly due to higher inventory level in Indonesia, while Malaysia inventory was flat mom for Jul 18.

·        Indonesian and Malaysian exports increased mom and yoy for Jul 18. Total palm and kernel oil exports from Indonesia and Malaysia was up mom and yoy to 4.1m tonnes in Jul 18. For 7M18, Indonesia’s palm and kernel oil exports were flat yoy.

·        The increase in exports mom were mainly supported by higher imports from India, while higher exports yoy on the back of higher imports from China.

·        Expect production continue to pick up in Aug 18. In Jul 18, Indonesia palm oil production increased by 8.5% mom, while Malaysia palm oil production increased by 12.8% mom. We are expecting production to continue increase in Aug 18 as entering peak production period.

·        Maintain 2018 CPO price assumption. To-date, CPO ASP is RM2,394/tonne (-17.6% yoy). For 2018, we maintain our CPO price forecast at RM2,400/tonne and 2019 CPO price assumption at RM2,500/tonne.

·        CPO prices could trend sideways in the near term. CPO prices are negatively correlated to palm oil inventory levels. As inventory is expected to increase in 2H18, CPO prices are expected at RM2,250-2,600/tonne in 2H18. CPO prices could trend even higher in end-4Q18 due to the low production season.

Figure 1: Bullish and bearish factors

Factor

Remarks

Bearish factors:

·        Palm oil imports of India and China have been lower than expected in recent months.

·        Indian palm oil imports plummeted by 0.6 Mn T from a year earlier in Apr/Jun and we expect a decline by 0.5 Mn T in July/Sept. This reduces total Indian palm oil imports to 8.5 Mn T in Oct/Sept 2017/18, 0.55 Mn T less than we had expected in early July and down 0.9 Mn T from last season.

·        Also palm oil imports of China will fall short of expectations, thus contributing to the overall poor performance in world palm oil imports which we now estimate to decline by 0.4 Mn T from last year in April/June and by 0.5 Mn T in July/Sept 2018. The low export volume kept palm oil stocks in the producing countries higher than expected. This contributed to price pressure. Crude palm oil, fob Indonesia, plummeted to US-$ 530 of late and was down by approximately US-$ 140 from a year earlier. Similar reductions occurred at other locations.

Bullish factors

·        There are bullish factors although they have not yet succeeded in a price recovery.

·        These factors are in related to palm oil production as well as palm oil usage for fuel. World production of palm oil will turn out smaller than expected in calendar year 2018. Our revised estimate is 70.2 Mn T for Jan/Dec 2018, down 0.6 Mn T from our previous estimate at the beginning of July and up only 2.3 Mn T from a year earlier.

·        We have also made a downward revision in our global production forecast for 2019 to 72.7 Mn T, down 0.3 Mn T from our previous number. The downward revisions occurred mainly in our estimates for Malaysia. The oil palms were damaged more severely than expected by the strong El Niño which persisted from early 2015 until early 2016. The lagged effects on yields are likely to last longer than anticipated. At least this is a conclusion we make when looking at the latest numbers.

·        There have been significant year-on-year reductions in total Malaysian palm oil production in June 2018 to only 1.33 Mn T (against 1.51 Mn T a year earlier) and in July to 1.50 Mn T (vs. 1.8). There has been a recovery in August but total Malaysian production of an estimated 1.68 Mn T (our current OIL WORLD estimate) is still down sizably from 1.81 Mn T a year earlier. El Niño-caused drought conditions persisted until early 2016. For the average of Jan/April 2016 rainfall was only 65% of normal and there were many regions with monthly precipitation below 100mm, stressing oil palms considerably and affecting sex-determination (towards a higher number of male and lower number of female inflorescences), thus resulting in smaller production 24-26 months later. But from May 2016 onward rainfall had been favourably throughout most of Malaysia and this should have resulted in a noticeable improvement in yields and production from about June or July 2018 onward.

Source: Oil World

US: World production of soybeans will sharply exceed consumption in 2018/19, unless the current US-China trade dispute is settled soon or severe weather-caused damage occurs in major producing countries. We have raised our estimate on world soybean production to 362.7 Mn T for the new season, about 4 Mn T above our previous estimate 7 weeks ago and 24 Mn T above the decimated world crop of 338.8 Mn T in 2017/18. But with Chinese soybean crushings being curtailed and likely to fall below the year-ago level in the first half of the 2018/19 season, the annual growth in world soybean crushings is likely to slow down to about 7 Mn T in Sept/Aug 2018/19, compared with an average annual growth of 14.3 Mn T in the five seasons ending 2017/18.  (Source: Oil World)

Figure 2: Soybean supply and demand

Soybean (m tonnes) 

 2015/16 

 2016/17 

 2017/18 

 2018/19F 

 2018/19F 

       

(Old)

(New)

Opening stocks

82.7

76.9

95.7

91.9

91.0

           

Production

310.9

348.3

338.8

358.8

362.7

  USA

106.9

116.9

119.5

120.0

123.5

  Argentina

54.4

54.6

35.5

53.0

52.0

  Brazil

95.4

114.1

119.0

119.0

121.0

  Others

54.2

62.7

64.8

66.8

66.2

Total Supply

393.6

425.2

434.5

450.7

453.7

Supply Growth (%)

2.9

8.0

2.2

3.9

4.4

           

Crush

274.1

284.6

296.8

304.0

303.6

Other Use

42.6

44.8

46.7

50.0

48.5

Total Demand

316.4

330.5

343.5

354.0

352.1

Demand Growth (%)

5.6

4.0

3.9

3.5

2.5

Ending Stocks 

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