Good news: Malaysia’s Jan 09 inventory is down 8% mom
Malaysia’s Jan 09 CPO inventory dropped 8% mom to 1.83mn tons. Inventory declined even though demand was lower as indicated by the 17% drop in exports to 1.35mn tons. As a result, inventory is now at a 9-month low and way below its all-time high of 2.27mn tons in Nov 08. Note that Malaysia is the world’s second largest CPO producer and is expected by Oilworld to produce about 17.9mn tons of CPO this year. Malaysia’s share of the world market for CPO is about 40%.
Bad news 1: the low production is due to cyclical factors
The decline in inventory has been helped by the drop in production. CPO production in Jan 09 declined 10% mom to 1.33mn tons. However, we believe the decline in inventory is not because of Malaysia’s replanting program or the country’s ability to increase domestic demand but because of the cyclical nature of the business since CPO production is usually lower in the first half of the year.
Bad news 2: lower demand is here to stay
We also believe that demand for CPO will remain at low levels. The collapse in crude oil prices and slower global economic growth are the main reasons. This prognosis is supported by the latest findings of the cargo surveyors Intertek and SGS which reported that Malaysia’s CPO exports were down by 15% and 3% mom, respectively, in the period of 1-10 Feb 09.
Maintain UNDERWEIGHT
Overall, we maintain our negative stance on the industry. We take this view because: (1) replanting and higher domestic demand in Malaysia and Indonesia has not kicked in yet, (2) global demand is expected to remain weak, and (3) Indonesia’s numbers, especially its production and inventory, are unknown (note that Indonesia is the biggest CPO producer). The main risks to our recommendation are bad weather and lower soybean supply.
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