Malaysian Plantations - Record inventory levels yet again

Event
Malaysian palm oil inventories rose to a record 2.27m tonnes as at end November 2008 (up 25% YoY and 9% MoM) as per data reported by the Malaysian Palm Oil Board today.

Impact
We believe that this is likely to put further pressure on CPO price in the near term. The market is clearly unable to absorb the increase in supply from strong production this year and, with global economic growth expected to slow down further in coming months, we believe that inventories are likely to remain high.

We also note that record CPO production was achieved in the month (slightly up MoM and YoY), despite market expectations of a slowdown due to potential biological stress to estates in Malaysia. We had highlighted earlier that production in November was likely to remain strong as our checks had indicated that fruits in East Malaysia attained late maturity this year (in October and November) compared to Peninsular Malaysia (September).

Although recent data for Indonesian inventory is not available, we note that the Executive Director of Indonesian Confederation of Vegetable Industries was quoted earlier this week saying that palm oil export volumes out of Indonesia are expected to drop by 31% YoY in 4Q08. Given that Indonesian palm oil inventories were reported to be about 2m tonnes at the end of September, a slowdown in exports in 4Q08 could mean that inventories there could also rise substantially.

Going forward, we do expect Malaysian palm oil inventories to come down over the next three months, as we enter a seasonally low production period (Nov-Feb). However, we believe that inventories would still remain elevated relative to historical levels.

Action and recommendation
We maintain our Underweight view on the Malaysian plantations sector. The valuations of the Malaysian plantation companies still remain rich at 15-20x 2009E earnings vs historical average of 10-14x.