LONDON(Commodity Online): Barclays is forecasting higher-than-expected production in both Malaysia and Indonesia in Q2 2011 and disappointing import volumes into key consumer countries to push the global palm oil market into surplus this marketing year (ends September).
While demand has started to recover, a trend we believe will be sustained, continued strong production in Indonesia, in particular, is likely to keep the market in a slight surplus in the marketing year 2011/12 as well.
Production side
Palm oil production remains strong, with the latest Malaysia Palm Oil Board (MPOB) data for July showing a fifth consecutive month of y/y increases. Using the latest export data from the Indonesia Palm Oil Association (Gapki) as a proxy, Indonesia’s production is also estimated to have grown by an even more impressive 9-10% y/y.
“Therefore, we have adjusted our forecasts for Malaysia and Indonesian production higher to reflect such strength. We highlight that higher Indonesia production, in particular, is a result of: (i) increases in Fresh Fruit Bunch (FFB) yields, especially from younger trees, as smallholding plantations improve land fertility and cultivation methods; and (ii) a surge in new plantings back in 2006 has paved the way for a spike in production in 2011/12, as yields usually increase by almost 40% y/y when trees enter their fifth/sixth year of production.”, Barclays said.
Nevertheless, production will continue to be subject to the vagaries of weather, and an increase in the Southern Oscillation Index (SOI) back to 10.7 in July suggests there could be some volatility in meteorological patterns in the near term after the strong El Nino-La Nina phase in late 2010/early 2011.
Drawing reference from Malaysia’s FFB yield pattern post the last El Nino-La Nina in 2005, strong production for about six months after the end of the La Nina period could be followed by a moderation in yields. This suggests that yields could fall as we enter Q4 2011. Indeed, July’s data have already presented early signs of a slowdown, with the largest producing states of Sabah and Johor witnessing 3% m/m declines in output.
Given the strength in production, palm oil’s discount to some of its substitutes, such as soybean and sunflower oil, has been elevated, although it is still not as high as that in 2008. That the discount has not narrowed is, we think, largely due to a much more optimistic outlook for palm oil production compared with soybean oil and rapeseed oil, etc.
Palm oil’s discount to soy oil to persist
“We expect palm oil’s discount to soybean oil, for instance, to persist throughout summer unless US soybean crop yields are hit and the soybean oil market tightens, widening the discount to the extent that it encourages a lot more substitution away from soybean oil into palm oil.” Barclays said.
“On the demand side, with stockpile releases in China and a bumper oilseed crop in India, we have readjusted both our India and China demand forecasts for this marketing year to 6.9mn tons and 6.0mn tons, respectively, hence reducing our global demand forecast for palm oil to 47.3mn tons.”, the bank said.
Demand side
For the next marketing year commencing in October 2011, Barclays expect palm oil demand to grow at a robust pace of 5.5% to 49.9mn tons.
India’s record 2010/11 domestic oilseed output of 31.1mn tons, up more than 6mn tons compared to previous year’s crop, has put pressure on their palm oil imports in Q1 2011. Double-digit m/m import growth since April has raised doubts over whether these levels can be sustained. With such a hefty increase in domestic oilseeds output, even allowing for robust domestic demand, we would expect palm oil imports to moderate over the rest of the marketing year and to average 650Kt per month in Q3 2011, and around 500Kt per month in Q4 2011.
China, the second largest consumer, has also witnessed disappointing import demand so far this year, with y/y declines every month, although the latest import figure of 514Kt for June indicates that the usual summer pick-up in demand has started. With the release of soybean and rapeseed oils from state reserves until May, the domestic edible oils market was adequately supplied, although the cap on retail cooking oil prices deterred a larger supplyside response to higher demand.
