Another scary indication that Golden Agri-Resources is heading for a remarkable slowdown next year

World's largest producer of crude palm could drop to the lowest level in five months in Dec.

As one of the largest palm oil plantation owners in the world, Golden Agri-Resources (GAR) could be facing a relatively muted outlook in
the medium term, given the bearish outlook for CPO (crude palm oil) prices on the back of growing supply concerns, said OCBC.

Citing recent media reports, OCBC notes that CPO exports from Indonesia – the world’s largest producer – could drop to the lowest level in five months in Dec as sluggish economic conditions weigh on demand. One Bloomberg survey, it adds, expects shipment to fall 3% MoM to 1.55m tonnes, with inventories remaining unchanged at 3m tonnes.

Here's more from OCBC:

Some industry experts like Dorab Mistry (director at Godrej International Ltd) also expect the commodity to enter into a bear market in 2013 as monthly output in both Indonesia and Malaysia surge to record highs; this as the possibility of an El Nino has now faded away.

Speaking at the 8th Indonesian Palm Oil Conference on 30 Nov, Mistry estimates that Indonesia will produce some 30m tonnes and Malaysia at least 19m in 2013. Mistry also predicts that the super-normal profits in palm oil cultivation are coming to a close, but he still expects palm oil plantations to prosper and thrive, giving investors handsome returns. However, he notes that success will now require good management, astute deployment of resources, continuous improvement in yields and containment of costs.

Excess inventory overhang to persist

This does not bode well for many of the CPO producers as many of them are already facing an excess inventory overhang situation at the end of 3Q12. GAR saw its growing stockpile hit 483m tonnes at end- Sep, up from 431m at end-Jun, and with production still running quite strongly, we expect the inventory may take a while to clear.

Nevertheless, we believe that our model has sufficiently adjusted for this, and hence we maintain our HOLD rating and S$0.65 fair value on the stock.

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