Asia Nikkei Review (10/07/2019) - KUALA LUMPUR (Nikkei Markets) -- Malaysia's palm oil inventory shrank for the fourth straight month in June, falling to its lowest level in nearly a year as production fell.
However, potentially feeble demand in the months ahead post-Eid celebration and typically higher output in the second half of the year with a spike in October are likely to weigh on price of the commodity used in everything from snacks to cosmetics, analysts said.
The stockpile in Malaysia, the world's largest palm oil producer after Indonesia, totaled 2.42 million tons in June, easing from 2.45 million tons in May, the Malaysian Palm Oil Board said in a statement. That was the lowest level since July 2018.
Inventory will probably hover around 2 million tons to 2.1 million tons until year-end, said Public Investment Bank's Analyst Chong Hoe Leong. "Second-half is always high production season and if exports do not do well, it will put more pressure on price," he said.
Exports fell 19.4% to 1.38 million tons in June compared with May's shipment of 1.71 million tons, while output declined 9.2% month-on-month to 1.52 million tons from 1.67 million tons in May. Imports however unexpectedly surged 64% to 101,250 tons.
The data is provisional and may be revised later.
Palm oil futures have declined more than 9% so far this year. The most-traded crude palm oil contract for September delivery fell 0.9% at 1,924 ringgit per ton on Bursa Malaysia Derivatives.
Price of palm oil, a key export commodity of Malaysia and Indonesia, has come under pressure since the European Union proposed import restriction of the item over allegations of deforestation and unsustainable farming practices.
To allay such concerns, Malaysia has proposed to limit palm oil acreage to 6.5 million hectares by 2023. Over the longer term, the government has also expanded the so-called biodiesel programs to help raise domestic consumption and narrow the stockpile in a bid to lift prices.
In terms of markets, shipments to India, the world's largest importer of vegetable oil, slumped 20% month-on-month to 423,621 tons, while exports to China fell 15.4% to 107,634 tons from 127,155 tons a month ago. Shipments to the EU declined 11% to 182,043 tons following biofuel limit regulation.
Biodiesel exports shrank 53.4% to 31,022 tons in June from 66,617 tons a month earlier.
Still, lower levels of palm oil stock would not lift prices if exports continue to slow or demand remains weak, according to BIMB Securities' Analyst Noorhayati Maamor. There is limited upside to prices due to cheaper substitutes, a stronger ringgit and lingering U.S.-China trade tension, she said.
"Currently, most of the companies under our coverage are fully valued and are at risk of further earnings disappointment on weak palm product prices outlook," she added.
Shares of Sime Darby Plantation, the world's largest oil palm producer by acreage, fell 0.4% at 4.88 ringgit apiece, while the benchmark FBM KLCI closed 0.2% lower.
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