Palm oil names opened strong yesterday morning with Wilmar gaining as much as 6.2% during the early part of trading. It eventually closed 3.6% higher, outperforming the STI index which ended in the negative region. Wilmar also outperformed other palm oil names in the market.

Technical Indicators
Wilmar closed at $3.16 on Monday, slightly above its 50-day moving average of $3.14. The stock also touched its 100-day moving average price of $3.23 during the early part of Monday’s trading. Volume traded was approximately 27 million shares, three times its 15 day moving average volume of 7.3 million shares. 

Rally in palm oil futures
Wilmar’s move came on the back of a rally in palm oil futures. November palm oil futures climbed 2.8% to RM $2,434 per metric ton on the Bursa Malaysia derivative exchange yesterday, the biggest gain for active contracts since Dec 21 last year. According to Bloomberg, the market was concerned that the soybean crop in the US might have a lower than forecasted harvest. Palm oil may be regarded as a close alternative for soybean oil in the food producing industry.

The rally in palm oil futures was also partly fueled by speculation that a weakening ringgit will help to boost palm oil exports in Malaysia. The Malaysia ringgit has depreciated 7.4% against the dollar this year, hitting its 3 year low last week. Higher palm oil prices benefit food producers such as Wilmar, allowing them to realize their palm oil inventory and other food products at higher prices, leading to potentially higher profit margins.

Indonesia cuts taxes
On the other hand, Indonesia reduced its taxes on palm oil for the first time in 4 months to help boost sales. The tax has been reduced to 9% in September, down 1.5% from the August tax rate. According to the Indonesian Palm Oil Association, exports fell 1.6% to just 1.59 million tons in July, while exports from Malaysia climbed 0.5% to 1.42 million tons. 

Indonesia is the top producer for Crude Palm Oil (CPO) in the world, followed by Malaysia. It is believed that the 2 palm oil exporting countries will continue to compete for export sales in the coming months. Wilmar has sizeable plantations in both Malaysia and Indonesia. The lower taxes are good news for Wilmar as it can help to stimulate export sales and boost profits.

Source: Macquarie Research - 27 Aug 2013