PublicInvest Research

Author: PublicInvest   |   Latest post: Thu, 23 Jan 2020, 9:38 AM


Plantations - Less Than Expected Drop in Inventories

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Despite seeing inventories at a three-month low in Nov, the contraction was less than expected, which may trigger a pullback in CPO prices following its extended rally over the last 2 months. We believe CPO futures may have overshot fair values, and a near-term retracement to RM2,700/mt-2,800/mt level is likely. Since early-Oct, CPO futures had risen more than 36% to RM2,900/mt, the highest level in more than 2 years. Nov CPO price averaged RM2,511/mt, bringing YTD average to RM2,078/mt. In view of tightening inventories in the coming months, we remain positive on the plantation sector with an unchanged CPO price forecast of RM2,600/mt for 2020. Our top picks are Sarawak Plantation, Ta Ann and TSH Resources.

  • Inventories contracted less than expected. In contrast to market expectations of 2.15m mt, palm oil inventories fell only 4.1% MoM to 2.26m mt as exports saw a steeper drop as compared to production. Meanwhile, stock-usage ratio rebounded from 9.9% to 11%.
  • Weaker exports to EU, India and US markets. Palm oil exports softened by 14.6% MoM to 1.40m mt, weighed by weaker demand from the EU (-11.5%), India (-35.1%) and US (-43.8%), despite stronger exports to China (+23.5% YoY) and Pakistan (+11.9% YoY). Palm oil exports face stiffer competition from other vegetable oils in the coming months given that CPO prices have now become expensive than soybean oil. Meanwhile, demand from China and domestic markets should remain sustainable as demand picks up ahead of Chinese New Year celebration.
  • Second monthly drop in production. Malaysian palm oil production experienced a bigger slide in Nov with a decline of 16.7% YoY to 1.53m mt, the lowest level since June 2019. FFB production from Peninsular Malaysia and East Malaysia saw declines of 20.5% and 12.4%, respectively. Yields in top growing state, Sabah, shrank by 17.6 YoY. Apart from the seasonal factor, the steep decline in production was also partly due to the lagged effect of prolonged dry weather in July and negative impact from the fertilizer cuts over the last one year.
  • Indonesia targets to replant 2.4m ha in 7 years. Indonesia plans to complete its replanting programme spanning a total of 2.4m ha owned by smallholders. It has replanted 12,353ha since 2017. The Agriculture Ministry has issued recommendation to replant 71,877ha out of its 180,000 target this year. State-owned Estate Corp Fund for palm has disbursed 2.3 tln rupiah to finance replanting efforts since 2017.

Source: PublicInvest Research - 11 Dec 2019

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