Market Intelligence Crude Palm Oil 11th January 2013

CPO traded lower, as investors build short positions in futures due to ample Palm Oil supplies in Malaysia. Further selling pressure is expected as higher than expected CPO output and relatively flat outbound sales pushed stocks to a record high. Palm oil shipments to China surprisingly fell ahead of tighter Chinese quality control rules.

However, some industry experts who expect the average CPO price to drop this year compared with last year are still bullish on the Palm Oil outlook. They see potential for CPO price to strengthen towards the later part of 2013. Any stresses on the global system in the form of weather or diseases can lead to production shortfalls, triggering price explosions. Industry players would be looking more intensely into ways to enhance labor productivity to reduce costs this year. Malaysian exporters are not rushing off to export directly and take advantage of the zero percent tax for this month yet as some planters may continue to sell to local refiners.

Rabobank signaled a downgrade ahead in its forecasts for prices of Palm Oil, which it had rated as its most bullish agricultural commodity for 2013, after Malaysian stocks of the vegetable oil defied market expectations by rising to a fresh record high. The uncertainty around future import demand, particularly to China, has acted to limit upside price moves. Palm Oil prices likely to remain range bound in coming weeks until a seasonal slowdown in Palm Oil production is likely seen in March. The downside in prices is also limited on account of the discount of Palm Oil prices to those in rival vegetable oils. In the medium-to-longer term this price discount is unsustainable. And a seasonal slowdown in Palm Oil production is likely to emerge by the end of the first quarter of 2013 which should narrow the price discount to Soy Oil.

Meanwhile, China reported an increase in Palm Oil imports. The demand outlook is being clouded by Chinese legislation on the use of retail Edible Oil blends, and lower reported per-store sales by major food service companies in the second half of 2012. Thailand, likely produce a record Crude Palm Oil output this year. While the record output will put some pressure on prices in the market, rising demand for bio diesel made from Palm Oil will underpin price levels.

According to Alvin Tai, senior plantation analyst at Kuala Lumpur-based OSK Investment Bank, the downside for CPO prices is relatively limited given parity to Brent crude prices which will help trigger demand for use in the energy sector. Additionally he said Malaysia's move to cut the tax on CPO exports and abolish a duty-free shipment quota from the beginning of January will have some positive impact on CPO shipments, and we should see the effects the next one to two months.

For the week ahead investors are likely to monitor export trends during the Jan 1-15 period to see whether a new tax rate has helped boost orders. Malaysia is scheduled to announce its February CPO export-tax rate on Tuesday.