• Maintain NEUTRAL; Top Picks: Kuala Lumpur Kepong, IOI Corp, and Wilmar International. We expect a knee-jerk positive reaction to global oilseed and vegetable oil prices as a result of the cancellation of the Russia- Ukraine grains corridor. However, we highlight that any supply shortage would only kick in by September, while Ukraine has been relying less on the corridor of late to ship out its products. In addition, buyers have been stocking up on sunflower oil in recent weeks in view of this possibility, so stock levels at importing countries are high.

• Russia terminates grain corridor. Russia suspended the grain corridor hours before the agreement’s expiry. First inked in Jul 2022, the United Nations-brokered Black Sea Grain Initiative has been repeatedly elongated in short increments, amid increasing discontent from Russia over perceived restrictions that limit the full dispatch of its own grain and fertiliser exports.

• There should be an upward knee-jerk reaction to CPO prices as a result of this news. Other oils and oilseeds would also spike up. It is still possible for Russia to change its mind – as it has happened in Oct 2022 – especially as Russia stands to lose with the cancellation of the deal. Sunflower seed from Russia and Ukraine make up 45% of global sunseed output. We highlight that the previous outcome of the price spike post Russia-Ukraine war announcement was a hoarding of inventory resulting in weak demand for many months as importers wound down their high stock levels.

• Exports out of Black Sea rose substantially in the past few weeks. We note that production and export supplies of sunflower oil have been exceeding expectations of late, primarily from the Black Sea region (Figure 1). As a result, stock levels of sunflower seed and oil are now low in Ukraine. This also resulted in sunflower oil export prices of USD850-900/tonne (FOB Black Sea) at sizable discounts vs the other major vegetable oils (Figure 4). Exporters maximised deliveries to avoid the risk of any disruptions of shipment routes should the grains deal not be renewed. Importers also seized the opportunity to stock up and satisfied an increasing share of their requirements with sunflower oil this season.

• Important timeline for resolution – September. We believe there is time for the grains deal issue to be resolved before any real damage is done to overall oilseed and vegetable oil supply, as the next crop cycle for harvesting in Russia and Ukraine only starts in September. Note that 25- 30m tonnes of sunseed are produced annually by Russia and Ukraine, or about 45% of total global sunflower seed output (Figure 3).

• Also, Ukraine no longer relies so much on the grain corridor. According to UkrAgroconsult, since Mar 2023, more crops were shipped out of the country by river ports, rail, and road than by the grain corridor and only c.1m tonnes was shipped out via the corridor in May (vs 2m tonnes via river ports). As such the reliance on the corridor has lessened considerably.

• NEUTRAL call maintained. We make no changes to our MYR3,900/tonne average price assumptions for now, but are in the midst of reviewing our price assumptions for 2024.

Source: RHB Research - 18 Jul 2023