• The Malaysian Palm Oil Board (MPOB) has released the country’s palm oil statistics for March 2019. Palm inventory in Malaysia eased by 4.6% to 2.92mil tonnes in March from 3.05mil in February. This was slightly above consensus estimates of 2.87mil tonnes. Recall that the 1.3% MoM increase in palm stockpiles in February had surprised consensus as the market was expecting a decline. We believe that March’s palm inventory exceeded consensus estimates due to a higher-than-expected production and carry-over inventory. February’s palm stockpiles were revised upwards to 3.06mil tonnes from 3.05mil. The 4.6% MoM decline in palm stockpiles in March was due to a 22.4% climb in exports and 21.2% increase in domestic usage.
• Looking at the statistics, we think that it would take time for CPO inventory to decline to palatable levels. This implies that CPO prices would continue to be in the doldrums unless there is a supply shock from El Nino. Average palm inventory was 2.07mil tonnes from years 2014 to 2018. So far, industry players are expecting CPO output in 2H to be higher than 1H. This implies that CPO production would start rising again from late 2Q2019 onwards.

• After falling in February due to fewer working days, Malaysia’s CPO production rose by 8.2% MoM and 6.2% YoY to 1.67mil tonnes in March. Malaysia’s CPO output improved by 10.0% YoY to 4.95mil tonnes in 1Q2019. Oil World has forecast CPO production in Malaysia to inch up by 3.0% to 20.1mil tonnes in 2019F from 19.52mil tonnes in 2018. CPO output in Sabah increased by 5.7% YoY in 1Q2019 while in Peninsular Malaysia, CPO production climbed by 13.6%. CPO output in Sarawak expanded by 6.2% YoY to 878,679 tonnes in 1Q2019.

• Palm imports rose by 92.5% YoY to 355,559 tonnes in 1Q2019. Comparing March against February, palm imports increased by 29.0%. We attribute the YoY increase in Malaysia’s palm imports in 1Q2019 to downstream companies buying cheaper CPO from Indonesia. The price difference between CPO in Indonesia and Malaysia is about RM200/tonne to RM300/tonne currently. Domestic disappearance of palm oil rose to 988,820 tonnes in 1Q2019 from 703,745 tonnes in 1Q2018. We believe that most of the palm oil were used domestically for the implementation of the B10 biodiesel policy.

• Malaysia’s palm exports improved by 5.2% YoY to 4.62mil tonnes in 1Q2019. This was driven mainly by a 29.2% rise in exports to India and 49.9% climb in exports to China. Positive demand from the two countries helped compensate for a 15.7% fall in exports to the Netherlands. The EU accounted for 12.8% of Malaysia’s palm exports in 1Q2019.

• We have an UNDERWEIGHT stance on the plantation sector in 1H2019. We believe that CPO prices would continue to be weak due to ample stockpiles. We have an average CPO price assumption of RM2,300/tonne for Malaysia in 2019F.

Source: AmInvest Research - 11 Apr 2019