Wednesday July 13, 2011
By HANIM ADNAN
nem@thestar.com.my
Rising production and high inventory putting pressure on commodity
PETALING JAYA: The downward pressure on crude palm oil (CPO) prices continued yesterday amid rising production and an 18-month-high inventory. This has also triggered market talk that the commodity may slip to below RM3,000 per tonne this week.
The Malaysian Palm Oil Board (MPOB) said in its June statistics released on Monday that CPO production had increased to 1.75 million tonnes while end-stocks surged to 2.05 million tonnes despite higher exports at 1.58 million tonnes.
All CPO futures contract closed on a minus territory yesterday, with the third-month benchmark CPO futures for September contract down RM39 to RM3,034 per tonne.
HwangDBS Vickers Research said in its sectoral report yesterday that palm oil exports in the coming months were expected to rise on stock replenishment, some substitution and stronger demand during Ramadan.
However, CPO output is forecast to seasonally ramp up over the same period, boosted by yield recovery and new tree maturities.
“In our estimation, this should raise palm oil end-stock levels through end-August and keep them above two million tonnes until the end of the year.
“We believe CPO prices owe its current resilience to weak soybean crushing margins and expectations of 2% year-on-year drop in the US soybean harvest, which may tighten near-term soybean oil supplies.
“Therefore, CPO price is expected to resume its downtrend in the fourth quarter of this year,” it added.
Malaysian Estate Owners Association president Boon Weng Siew voiced his concern over the current high level of palm oil stocks. “When palm oil stocks rose to two million tonnes in the fourth quarter of 2008, CPO price went down to about RM1,500 per tonne!”
Boon said the Government's B5 (blending of 5% biodiesel with 95% fossil fuel) programme should help the industry to manage the domestic palm oil stocks level.
The programme, which kicked off officially early last month, will be undertaken in stages. It will start with the central region covering Putrajaya, Malacca, Negri Sembilan, Kuala Lumpur and Selangor.
Malaysian Biodiesel Association vice-president U.R. Unnithan told StarBiz recently that 170,000 to 200,000 tonnes of biodiesel were expected to be used in the B5 programme for the central region.
The Government is targeting some 500,000 tonnes of local palm oil stocks to be used for the entire programme.
Meanwhile, despite palm oil stocks rising above the two million tonne mark in June, OSK Research was not overly concerned as “we believe that most of the contributing factors are already known and may have been factored into the decline in palm oil prices from RM3,963 in February to a low of RM3,016 per tonne last week.”
The research outfit also reckoned that inventory might fall back promptly due to supply disruption in the second half of this year.
“With CPO now trading at a significant US$210 per tonne discount to soybean oil, there is plenty of room for palm oil price to move higher when supply disruption materialises in the months ahead,” it said.
Wednesday, July 13, 2011
Lower industrial production in May a strong sign
By FINTAN NG
PETALING JAYA: May's lower factory output as measured through the industrial production index (IPI) more or less confirms that economic growth for the second quarter and for the full year will be slower.
Although not unexpected, with the Government already forecasting year-on-year gross domestic product (GDP) growth to be between 5% and 6% this year against 7.2% growth in 2010, external factors should make things all the more challenging and uncertain.
Three of these factors weigh on global GDP growth: China's inflation, which hit a three-year high of 6.4% in June, the stubbornly high jobless rate in the United States and contagion fears in the eurozone.
HSBC Global Research's co-head Asian Economics Frederic Neumann said in a July 10 report that the persistent US high unemployment rate would mean a weaker summer employment outlook.
Less demand: Malaysia’s industrial production, including steel pipes, which fell 5.1% in May, is likely to remain soft although a recovery is expected in the third quarter.
“Asia will feel the chill mostly through exports. In fact, we've recently highlighted that export order growth has continued to slow across the region in June,” he said.
Neumann said stagnating external demand would persist beyond the end of Japanese supply chain disruptions, which was the main cause of Malaysia's drop in factory output.
He said policymakers in the region would still proceed with a gradual and cautious adjustment to interest rates due to inflationary pressure.
This adjustment would have to be balanced against currency appreciation, which would impact exports growth.
“This, as we have long argued, is not simply a lagged effect of rising food and oil prices earlier this year, but reflects an underlying deterioration in the trade-off between inflation and growth in the region,” Neumann added.
He said there was clearly a need to raise key interest rates further despite slower growth in the second quarter because Asia's inflationary pressure was due to excess capacity not being able to cope with demand.
JPMorgan Chase Bank's Singapore-based economist Ong Sin Beng expects industrial production to remain soft though some stabilisation may be expected in the June data before a recovery in the third quarter.
“The main uncertainty is not so much with the direction of the data but with the strength of the recovery and this requires a somewhat firmer final demand footing in the third quarter,” he said in a report.
Ong said while some of the slowing owed to a moderation in final demand in the developed economies, a large part was due to an inventory adjustment following the sharp expansion in production in the first quarter.
“In that context, the second-quarter softness is somewhat similar to the third quarter 2010 slowing, which took three months to reach the trough from the production peak,” he added.
The Statistics Department on Monday released May's IPI figures, which showed factory output declined 5.1% from a year ago, more than the median expectation of a 2.7% fall in a Bloomberg survey. This was also more than double the 2.2% drop recorded in April.
The Government forecasts GDP to grow 5% to 6% this year with most economists expecting GDP to grow around 5.5%. Last year, growth came in at 7.2% year-on-year.
GDP expanded 4.6% for the first quarter with economists expecting second-quarter growth to be slower on weaker external demand.
Keeping interest rates unchanged sensible, priority is growth
Wednesday July 13, 2011
Keeping interest rates unchanged sensible, priority is growth
Behind the News - By Jagdev Singh Sidhu
THE decision to keep interest rates unchanged last Thursday makes sense after looking at the big decline in industrial production.
The economy has lost quite a bit of momentum and with economists now expecting growth in the second quarter to come in at around 4%, the focus on keeping growth up at the expense of inflation is now the priority of the authorities.
A hint of such intent was spoken of by Bank Negara's monetary policy committee (MPC) when it issued its statement on Thursday.
“The MPC will assess carefully the evolving economic conditions and to the extent that the growth momentum is sustained, further normalisation of monetary conditions will be considered to safeguard price stability,” it said.
The reasoning behind it was, although inflation remained on the upside, the committee felt that while the outlook for growth remained positive, there were heightened uncertainties to economic growth arising from global developments that had created higher downside risks to growth.
Troubles in Greece, the sluggishness of the US economy and the supply chain disruption cause by the earthquake and tsunami in Japan have shaken the external environment growth prospects.
“The OECD composite leading indicators (CLIs) fell 0.23 point to 102.54 points in May (0.14 point drop to 102.78 points in April), marking the second consecutive month-on-month decline and pointing to a possible slowdown in most major economies,” said CIMB Research head of economics Lee Heng Guie in a note.
“The divergent growth rates between advanced and emerging economies remain but are converging.”
Lee noted that a similar slowdown in leading indicators was also seen in Asia where China's CLI declined in May for the fifth month in a row as the monetary tightening measures bit.
The CLI for India, too, was down in May, pointing to a further moderation in economic activity, he said.
While growth is now firmly in Bank Negara's crosshairs, it's not to say tackling inflation has taken a back seat. Bank Negara upped the statutory reserve requirement to 4% to mop up excess liquidity, and possibly relieve inflationary pressure, from the economy.
A higher interest rate would apply more brakes on the economy and even though economists were divided whether the central bank would raise borrowing costs last week, many felt the pause towards normalisation was the right thing to do right now.
The reason for their consternation was the dip in industrial production in May which showed activity at factories, mines and plantation had contracted by 5.1% year-on-year. April's figure was also revised to a contraction of 1.7%.
The culprit for the drop in May was the steep contraction in mining, in particular production of oil and gas which fell by 20.1% year-on-year.
Manufacturing was up marginally but apparently the sector is still feeling the effects of Japan's supply chain disruption.
“The disruption to Japan's industrial activities and global manufacturing supply chain from the natural disaster and nuclear power crisis was short-lived as indicated by the rebound in Japan's PMI (Purchasing Managers Index) to above-50 in May and June after the plunge in March and April,” said Maybank Investment Bank in a note.
“This should lead to improvement in manufacturing activities especially via re-stocking in the E&E (electronics and electrical) and automotive sector. At the same time, for Malaysia, the disruption to the oil and gas activities should be temporary and the consequent rebound in mining activities will add to the expected improvement in manufacturing activities to lift industrial production in the coming months.”
CIMB, too, was positive over the outlook in the second half of the year.
“In our view, growth will sustain but remain uneven given lingering headwinds. The slow and uneven growth in the US, sovereign debt risks in EU and supply chain disruptions in Japan are unlikely to halt global momentum. In particular, Japan's supply chain disruptions will be short-lived,” Lee in the note.
“Although we expect the growth of the global economy to slow somewhat in the first half, it should rebound in the second half.”
With the outlook right now for the economy to rebound in the second half, also aided by a lower base effect from the same period last year, economists expect a rate hike to take place this year over the remaining two meetings once the current growth bumps have been smoothened.
Keeping interest rates unchanged sensible, priority is growth
Behind the News - By Jagdev Singh Sidhu
THE decision to keep interest rates unchanged last Thursday makes sense after looking at the big decline in industrial production.
The economy has lost quite a bit of momentum and with economists now expecting growth in the second quarter to come in at around 4%, the focus on keeping growth up at the expense of inflation is now the priority of the authorities.
A hint of such intent was spoken of by Bank Negara's monetary policy committee (MPC) when it issued its statement on Thursday.
“The MPC will assess carefully the evolving economic conditions and to the extent that the growth momentum is sustained, further normalisation of monetary conditions will be considered to safeguard price stability,” it said.
The reasoning behind it was, although inflation remained on the upside, the committee felt that while the outlook for growth remained positive, there were heightened uncertainties to economic growth arising from global developments that had created higher downside risks to growth.
Troubles in Greece, the sluggishness of the US economy and the supply chain disruption cause by the earthquake and tsunami in Japan have shaken the external environment growth prospects.
“The OECD composite leading indicators (CLIs) fell 0.23 point to 102.54 points in May (0.14 point drop to 102.78 points in April), marking the second consecutive month-on-month decline and pointing to a possible slowdown in most major economies,” said CIMB Research head of economics Lee Heng Guie in a note.
“The divergent growth rates between advanced and emerging economies remain but are converging.”
Lee noted that a similar slowdown in leading indicators was also seen in Asia where China's CLI declined in May for the fifth month in a row as the monetary tightening measures bit.
The CLI for India, too, was down in May, pointing to a further moderation in economic activity, he said.
While growth is now firmly in Bank Negara's crosshairs, it's not to say tackling inflation has taken a back seat. Bank Negara upped the statutory reserve requirement to 4% to mop up excess liquidity, and possibly relieve inflationary pressure, from the economy.
A higher interest rate would apply more brakes on the economy and even though economists were divided whether the central bank would raise borrowing costs last week, many felt the pause towards normalisation was the right thing to do right now.
The reason for their consternation was the dip in industrial production in May which showed activity at factories, mines and plantation had contracted by 5.1% year-on-year. April's figure was also revised to a contraction of 1.7%.
The culprit for the drop in May was the steep contraction in mining, in particular production of oil and gas which fell by 20.1% year-on-year.
Manufacturing was up marginally but apparently the sector is still feeling the effects of Japan's supply chain disruption.
“The disruption to Japan's industrial activities and global manufacturing supply chain from the natural disaster and nuclear power crisis was short-lived as indicated by the rebound in Japan's PMI (Purchasing Managers Index) to above-50 in May and June after the plunge in March and April,” said Maybank Investment Bank in a note.
“This should lead to improvement in manufacturing activities especially via re-stocking in the E&E (electronics and electrical) and automotive sector. At the same time, for Malaysia, the disruption to the oil and gas activities should be temporary and the consequent rebound in mining activities will add to the expected improvement in manufacturing activities to lift industrial production in the coming months.”
CIMB, too, was positive over the outlook in the second half of the year.
“In our view, growth will sustain but remain uneven given lingering headwinds. The slow and uneven growth in the US, sovereign debt risks in EU and supply chain disruptions in Japan are unlikely to halt global momentum. In particular, Japan's supply chain disruptions will be short-lived,” Lee in the note.
“Although we expect the growth of the global economy to slow somewhat in the first half, it should rebound in the second half.”
With the outlook right now for the economy to rebound in the second half, also aided by a lower base effect from the same period last year, economists expect a rate hike to take place this year over the remaining two meetings once the current growth bumps have been smoothened.
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