• Bloomberg reported that the Malaysian Palm Oil Council, China Chamber of Commerce of Foodstuff and Native Produce have signed an MoU for China to purchase an additional 1.9mil tonnes of palm oil between 2019 and 2023. The palm oil is worth RM4.56bil according to the Primary Industries Ministry. The pact also includes at least RM2bil investments for a biojet fuel plant.

• The Edge Financial Daily said that this is in addition to the palm purchase contracts signed in March for the export of 1.62mil tonnes of palm oil from Malaysia to China. Recall that the bulk of the purchase contracts signed in March involved the sale of palm oil between the Wilmar group of companies in Malaysia and China.

• We view the MoU positively as it would increase Malaysia’s palm exports to China. Still, the additional 1.9mil tonnes of palm oil over five years from 2019 and 2023 translate into an incremental palm exports of only about 380,000 tonnes per year.

• The additional palm exports of 380,000 tonnes per year is about 1.9% of Malaysia’s estimated CPO production of 20.1mil tonnes for 2019F. Malaysia’s palm exports (crude and processed palm oil) amounted to 16.5mil tonnes in total in 2018.

• China imported about 1.86mil tonnes of palm products (crude and processed palm oil) from Malaysia in 2018. China was the second largest buyer of Malaysia’s palm products in 2018 after India. China accounted for 11.3% of Malaysia’s palm exports in 2018.

• We believe that the exports to China reported in the press of 3.07mil tonnes for 2018 include palm kernel, oleochemical and biodiesel products. The monthly palm inventory number released by the MPOB consists of crude and processed palm oil products.

• Working backwards, the value of the MoU of RM4.56bil translates into an average CPO price of RM2,400/tonne. Yesterday, spot CPO price closed at RM2,050/tonne.

• We maintain an UNDERWEIGHT stance on the plantation sector. We believe that CPO prices would remain weak going forward as palm production is expected to rise ahead of the peak production period in 3Q2019.

Source: AmInvest Research - 26 Apr 2019