Plantations Monthly Review: November 2008

December 2, 2008 at 4:53 am Leave a comment

• Stuck in a rut this month
Average MPOB prices for the month were 11.3% lower than October at RM1518 per MT as prices continued to see pressure from rising stock levels as well as continued weakness seen in crude oil and soy prices.
MPOB reported during the month that production still continued to rise showing a prolonged peak production period in the industry. This has been largely due to a later peaking of production in Sabah while numbers in Peninsular Malaysia are tapering off sooner. Looking into December, we expect more of the same as many plantation companies have reported generally good production over the November period.
• But export numbers should have recovered November
On a more positive note, cargo surveyors Intertek and SGS have reported double digit shipment growth in November so far citing an increase in exports to China and Pakistan. We may finally see export recovery come December and January as China may indulge in pre-stocking for CNY. Coupled with this, CPO prices have been relatively stable of late and this will reduce the issue with contract defaults.
• 3Q results – most companies achieved >RM2,800 asp.
Companies announcing results over the month cited that their CPO ASP’s were above RM2,800 per mt. In fact, IOI beat all expectations and turned in an average price of RM3,391. However, there was a notable weakness in margins across the board as companies continue to grapple with high production costs. To note, MPOB prices averaged RM2,809 over 3Q08. 4Q outlook however is bleak across the board with an average expectation of RM,1700.
• 6 come together to stem fertilizer prices
Despite that most fertilizer prices have come off, companies reportedly continue to suffer high prices and they cite this to be a problem with suppliers. Hence by holding back/ regulating the use of fertilizers in unison, producers hope that they would be able to push down prices.
• The coast is not yet clear, Maintain Neutral for now.

MPOB October Stats – not out of the woods
October’s MPOB statistics showed a 6.9% increase in MoM stock levels coupled with a 4.6% increase in production. Clear signs that the industry was still weighed down by stocks despite that exports recovered by 3%. Looking at figure 2 below, it is apparent that the peak production cycle is showing resilience this time around and it may only be in 1Q09 when production numbers start to come off. To note, we learnt that Sabah is seeing a late peaking of production this year due to weather patterns last year hence the peak cycle could be seen into November or even December stats. Through various meetings and briefings we had with plantation companies over the month, most have agreed that they were still seeing production growth into 4Q08.

But November export numbers appear to be picking up
Over the month however, both cargo surveyors, Intertek and SGS have reported a sharp recovery in export numbers. SGS has reported a 15% increase so far from 1-25th November and cited that the increase was led by shipments to China (27.4% increase) and Pakistan (29% increase). Intertek, has reported a 12% MoM increase so far. It appears that we may finally see double digit export growth numbers come December then MPOB announced their numbers.

Trying to control fertilizer costs – and guard margins
6 plantation companies (Sime, IOI, KLK, UP, Felda and Boustead) came together during the month to discuss initiatives and one of them was to hold back /regulate fertilizer use in order to force fertilizer suppliers to bring down prices. Notably, despite that most fertilizer prices have come off as seen in figure xx below, companies reportedly continue to suffer high prices. Besides the ammonia and urea shown below, companies report that nitrogen prices have come off too. As reported by Asiatic, basket CPO prices have come up to RM1400 while they used to be just RM1000 in the earlier part of this year. To note, companies like TH Plantations stated that they plan to cut fertilizer use by up to 30% while, KLK talked about some 20% reduction to lower production costs per tonne. Among most companies, fertilizer makes up 30-50% of production cost per tonne making it by far the most significant cost factor companies have to deal with. Those enjoying lower production costs this year, like Asiatic, would be ones that have bought forward their fertilizer needs.

Different companies different takes
As results were announced during the month, many companies came out with statements on their expectations for CPO prices in the coming 12 months or over the FY09 period. IOI cited an expected recovery and a rather wide range for prices at RM2000-RM2400. Sime chief came out with a bearish view of RM1800 and has only packed in a RM1700 average for their newly revised FY09 KPI. Besides this, Boustead has talked about prices recovering to above RM2000 especially when production starts to taper off during our meetings with them while Asiatic has similar sentiments about prices.

CPO vs. Oil prices and Soybean prices

Naturally there has been no decoupling of food commodities from oil prices over the month. As crude oil continued its plummet so did CPO prices and soy prices. To note, there have been no major changes in soy fundamentals over the period as well although news has been cropping up (read in Oil World) on lower than expected yield from Argentina and Brazil in coming periods due to unfavourable weather. This could be good news should it eventually happen. Looking into stocks under coverage, we note that IOI has actually made quite a swift MoM recovery but Boustead has topped the list.

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