• The Malaysian Palm Oil Board (MPOB) has released the country’s palm oil statistics for December 2018. Palm inventory in Malaysia increased for the seventh time in December. December’s palm inventory of 3.215mil tonnes is the highest ever in Malaysia. The previous high was 3.01mil tonnes in November 2018. Consensus had forecast Malaysia’s palm inventory to be 3.14mil tonnes as at end-December 2018.
• Going forward, we think that palm inventory would start easing from April or May 2019 onwards as production tapers off. Still, we reckon that it would take about six months for palm inventory in Malaysia to fall to the more palatable levels of 2.0mil to 2.3mil tonnes. Average palm inventory in Malaysia was 2.05mil tonnes in the past five years. Hence, there is no catalyst for CPO prices to surge in the immediate term. The rise in palm inventory in Malaysia in December 2018 was driven by the high carry-over stocks from November and a 3.4% drop in domestic disappearance. Palm exports were flat MoM in December compared with the 2.0% slide in palm production. Excluding Sarawak, CPO output in Peninsular Malaysia and Sabah was relatively flat MoM in December 2018.
• Average CPO price was RM2,235/tonne in 2018, 19.9% lower than the average price of RM2,792/tonne in 2017. Average price discount between CPO and soybean oil (Europe prices) was 24% or US$187/tonne in 2018 vs. 15.4% or US$131/tonne in 2017. Going forward, we have assumed an average CPO price of RM2,300/tonne for 2019F (2018: RM2,235/tonne).
• CPO production in Malaysia slid by 2.0% YoY to 19.52mil tonnes in 2018. Oil World has forecast CPO output in Malaysia to inch up by 3.5% to 20.2mil tonnes in 2019F. Comparing December against November 2018, CPO production in Sabah eased by 0.7% to 512,044 tonnes while CPO output in Peninsular Malaysia declined by 0.2%. CPO production in Sarawak fell by 8.4% to 344,366 tonnes in December 2018 from 375,871 tonnes in November.
• Malaysia’s palm exports edged up by 0.3% YoY to 16.6mil tonnes in 2018. Palm exports to India surged by 23.9% in 2018 while the EU and China’s demand fell by 4.0% and 3.0% respectively. We believe that India’s demand for Malaysia’s palm products would continue to rise in 2019F due to the reduction in the import duties for CPO to 40% from 44% and refined product to 45% from 54% 1 January 2019 onwards. This is pursuant to the Malaysia-India Comprehensive Cooperation Agreement signed in year 2010.
• We are UNDERWEIGHT on the plantation sector in 1H2019. Due to the current high levels of palm inventory in Malaysia and Indonesia, we believe that CPO prices would remain in the doldrums in the immediate term.

Source: AmInvest Research - 11 Jan 2019