Credit Suisse - Asia Palm Oil Sector Update

Watch out for 30 June USDA report – soy planting is expected to be significantly higher

● Year-to-date, palm oil prices have peaked at RM2,880/tonne (t) in mid-May to current levels of about RM2,300/t.
● Negatives for vegetable oil prices: 1) Germany will cut 2009 biodiesel blending target to 5.25% from 6.25% originally intended; 2) speakers in 2009 Indonesia Palm Oil Conference expect palm oil prices to decline to US$550-600/t; 3) vegetable oil inventories at Indian ports hit an all-time high; and 4) 30 June USDA report on actual soy plantings will show a higher area than the intentions report.
● Positive for vegetable oil prices is Oil World projects the stock-touse ratio for global 17 oils and fats will decline to 10.3% in the 2009/10 season versus 10.4% in the current 2008/09 season.
● We remain bearish on palm oil, as we expect supply to recover (reversal of tree stress, seasonally high production) while exports to wane (exports to India unsustainable, restocking is over).

Maintain UNDERWEIGHT on Malaysian palm oil stocks and OVERWEIGHT on Indonesian palm oil players. El Nino is the wild card.

Negatives for vegetable oil prices
● Germany's lower house of parliament approved the government’s proposal to cut 2009 blending target to 5.25% from the 6.25% originally intended. It overturned a decision by the upper house, which blocked the government’s proposal because of fears they would harm investments in the German biofuel industry. (Reuters).
● Speakers in 2009 Indonesia Palm Oil and Price Outlook Conference in Bali believe that palm oil prices will decline to an average of US$550-600/mn t compared with the recent peak of US$760/mn t. (The Jakarta Post).
● India's soyoil imports surged recently. India abolished a duty of 20% on crude soyoil in March 2009 (purchases made then are now arriving at ports). India's share of soyoil is likely to be sharply higher and this will reduce palm oil's market share, which averaged 83% during November 2008-May 2009 period. Vegetable oil inventories at Indian ports hit an all-time high of around 0.8 mn in early June and coupled with weakening local demand had caused 10-20% of shipments to be postponed to
later months. (DJ).
● Weather conditions in the US improved. As of June 15, soybeans were rated good to excellent on 66% of the acreage (versus 56% a year ago). It is expected that June 30 USDA report on actual soy plantings will show a considerably higher area than the intentions report. (Oil World).

Positive for vegetable oil prices
● Oil World is projecting that the stock-to-use ratio for global 17 oils and fats will decline to 10.3% in the 2009/10 season versus the 10.4% in the current 2008/09 season. Soybean supply will be ample in 2009/10, particularly in the second half of the 2009/10 season, but soy is primarily a “meal seed” and will not be able to replenish low edible oil inventories. Oil World projects palm oil price will average 15% YoY higher at US$800/t C.I.F. during July 2009 to June 2010 (or about RM2,600 F.O.B).
● Mission Newenergy has commissioned its new biodiesel refinery in Malaysia which will triple its capacity to 350,000 tonnes. (AUX).
● Palm oil output growth in Malaysia will stay weak for the next two years because of an aggressive replanting scheme and hot weather will aggravate yield stress on oil palms, said Sabri Ahmad, Chairman of MPOB. MPOB reduced its 2009 palm oil output forecast by 1.2% to 17.5 mn t. (Reuters).
● A report jointly published by Organization for Economic Cooperation & Development and UN Food & Agricultural Organization said that international food prices will likely remain high during the next decade, although they will probably not hit the
heights that sparked riots last year. Crop prices are expected to be 10-20% higher during the next decade than during the previous 10 years due to higher input prices and biofuel prices. The report also predicts energy costs and erratic weather may make prices more volatile in the future.