• Palm Oil (PO) end-stocks ended 0.7% higher on MoM basis, reaching 1.73mn tonnes in July 2023 no thanks to higher production (+11.2% MoM to 1.61mn tonnes), despite greater exports momentum (+15.5% MoM to 1.35mn tonnes). This was also underpinned by higher carry stock from last month.

• In our view, the recent increase in CPO price to approximately RM3,800/MT-RM4,000/MT in July 2023 could be temporary and was primarily influenced by concerns over edible oil supply constraints after Russia's decision not to renew the grain deal. This circumstance led to two main factors contributing to the rise in CPO price: 1) a surge/rally in Soybean oil (SBO) price, and 2) heightened demand primarily driven by restocking activities ahead of festivities. These catalysts could be nearing their end.

• Looking beyond August, we anticipate a moderation in CPO price to be influenced by the following factors: 1) an increase in palm oil production during its seasonal recovery period, 2) improved US crop conditions i.e., soybean and corn due to favourable weather, and 3) sluggish demand outlook. We maintain our average CPO price forecast of RM3,500/MT for 2023 and keep our trading range estimates of approximately RM400/MT above or below RM3,500/MT for the near term.

• Maintain a NEUTRAL call on the plantation sector given that most companies under our coverage, this year, may face with heightened risk of challenging earnings on the back of lower palm products price (vis-à-vis of last year) and higher operating costs.

Marginal inventory increased MoM despite PO export growing momentum. PO end-stocks increased by 0.7% MoM but dropped by 2.4% YoY in July to 1.73mn tonnes, no thanks to higher production (+11.2% MoM to 1.61mn tonnes), despite improving exports (+15.5% MoM to 1.35mn tonnes). The rise in exports is believed to be materially impacted by concerns over edible oil supply constraints as a result of Russia’s decision to withdraw from the Black Sea Grain Deal on 17th July 2023. This has led to CPO prices trending higher in the range of RM3,800/MT to RM4,000/MT for the month. In terms of CPO production, there was an increase of 11.2% MoM and 2.3% YoY to 1.61mn tonnes. This was primarily due to a 13.2% MoM and 7.03% YoY increase in fresh fruit bunch (FFB) yield to 1.37 tonnes per hectare, despite a 1.5% drop in the oil extraction rate (OER) for CPO to 19.54% (-1.61% YoY). It is expected that production will gradually improve before reaching its peak in the third quarter of 2023 or early November.

CPO price to stay in a range of circa RM400/MT above or below RM3,500/MT in the near term. We believe the recent increase in CPO price to approximately RM3,800/MTRM4,000/MT in July 2023 is temporary. This surge in price was primarily influenced by concerns over limited supply of edible oil following Russia's decision not to renew the grain deal. As a result, there was a rally in Soybean oil price and an increase in demand for PO from India and China, mainly driven by restocking activities ahead festivities. However, we expect these two factors that contributed to the rise in CPO price could subside soon.

Looking beyond August, we anticipate a moderation in CPO price, which is likely to be influenced by several factors:

1. Seasonal Recovery in PO Production: PO production typically goes through a seasonal recovery period (normally in 3Q to early of Nov), leading to an increase in output. As this occurs, the supply of PO in the market is expected to rise, which can put downward pressure on prices.

2. Improved US Crop Conditions: Favourable weather conditions in the US can result in improved crop yields for various commodities, including soybeans and other vegetable oils. Since SBO is a close substitute to PO, any positive developments in the US crop conditions and crushing activities can impact the overall vegetable oil market, including CPO prices.

3. Muted Demand Outlook: The demand for PO may remain subdued due to various factors, such as global economic uncertainties, inflationary pressures, and price sensitivity in importing countries. Hence, weak PO demand can contribute to the moderation of CPO prices.

4. Macroeconomic Factors: Global economic conditions, geopolitical events, and inflationary pressures can significantly influence commodity markets, including PO. Uncertainties in these areas can lead to price volatility and hence, impact the overall demand and supply dynamics of CPO.

5. Unexpected Events: There is always the possibility of unforeseen events, such as extreme weather conditions (e.g., El-Nino occurrence) or geopolitical tensions, which can disrupt supply chains and lead to sudden price movements. Such a scenario could have a significant impact on the market dynamics, leading to a price surge in the palm product market. In our best-case scenario, we anticipate that 2023 CPO price to average at a range of RM3,800/MT to RM4,000/MT in the event of unexpected events occurs. Conversely, for 2024, we project an average range of circa RM3,400/MT to RM3,700/MT.

Considering these factors, it is essential for industry players to closely monitor the developments in the palm oil market and be prepared to adapt to changing market conditions. As a result, the CPO price is likely to remain volatile as various factors come into play. Therefore, for now, we maintain our average CPO price forecast of RM3,500/MT for 2023, along with trading range estimates of approximately RM400/MT above or below RM3,500/MT in the near term.

Maintain a NEUTRAL recommendation on the sector with a BUY call on IOI (TP: RM4.75), and a HOLD call for KLK (TP: RM24.53), SIME Darby Plants (TP: RM4.62), GENP (TP: RM5.87), Sarawak Plant (TP: RM2.03), FGV (TP: RM1.25), HAPL (TP: RM1.79), and TSH (TP: RM1.02); whilst a SELL on SOP (TP: RM2.05) and Boustead Plants (TP: RM0.65), though a non-rated for TH Plant.

Source: BIMB Securities Research - 11 Aug 2023