• The Malaysian Palm Oil Board (MPOB) has released the country’s palm oil statistics for June 2019. For the fourth month in a row, palm inventory in Malaysia edged down. In spite of the drop in palm stockpiles, CPO prices have been languishing due to weak exports and concerns over rising supply in 2H2019. Palm inventory in Malaysia inched down by 1.0% to 2.42mil tonnes in June from 2.45mil tonnes in May. June’s palm stockpiles of 2.42mil tonnes were above consensus estimates of 2.37mil tonnes.
• Malaysia’s palm inventory was only slightly lower MoM in June 2019 as a 9.2% drop in production was offset by a 19.4% decline in exports. Palm imports also surged by 72.1% to 124,122 tonnes in June from 72,110 tonnes in May. We think that the price difference between CPO in Malaysia and Indonesia may have widened in June due to rising production in Indonesia. The price disparity of CPO between the two countries is usually RM200 to RM300/tonne.

• Domestic disappearance of palm oil shrank by 9.1% MoM to 283,235 tonnes in June after surging by 21.9% MoM in May. Domestic disappearance climbed by 22.8% to 1.84mil tonnes in 1H2019 from 1.49mil tonnes in 1H2018. We believe that the stockpiling of CPO for the implementation of the B7 biodiesel policy in the industrial sector eased in June. The industrial sector is expected to use B7 biodiesel from July 2019 onwards. The implementation of B10 biodiesel in the transportation sector and B7 in the industrial sector in Malaysia is envisaged to absorb about 761,000 tonnes of palm oil from the system. This is 3.8% of Malaysia’s estimated CPO production of 20.1mil tonnes in 2019E. Previously, the B7 biodiesel policy in the transportation sector in took out about 350,000 tonnes of palm oil from the system. It is estimated that there are 600,000 diesel vehicles in Malaysia.

• CPO production in Malaysia slid by 9.2% MoM to 1.52mil tonnes in June. CPO output increased by 9.8% to 9.79mil tonnes in 1H2019 from 8.92mil tonnes in 1H2018. Oil World has forecast Malaysia’s CPO production to be 20.1mil tonnes in 2019E vs. 19.52mil tonnes in 2018. We are not surprised by the MoM CPO production fall in June as estate workers usually take a two-week break for the Hari Raya festivities. We believe that CPO output in Malaysia would rebound strongly in July.

• Malaysia’s palm exports slid by 19.4% MoM to 1.38mil tonnes in June mainly due to a 15.4% fall in demand from China and a 19.9% plunge in shipments to India. There are ample stockpiles in China and India currently. Inventory of edible oils at the major pipelines and ports in India was 2.36mil tonnes as at early May 2019 compared with 2.1mil tonnes as at early April 2018. Palm inventory at the major ports in China stood at 729,400 tonnes as at end-May 2019 vs. 635,000 tonnes as at end-May 2018.

• Comparing 1H2019 against 1H2018, Malaysia’s palm exports expanded 12.3% to 9.37mil tonnes. Exports to China rose 16.3% YoY in 1H2019. Also, India’s demand jumped 86.1% YoY in 1H2019 on the back of lower import duties resulting from a trade agreement between Malaysia and India. The reduction in import duties took effect on 1 January 2019.

• We have an UNDERWEIGHT stance on the sector for 2H2019 as CPO prices are expected to be in the doldrums. Palm inventories may start to increase in July or August due to the peak production period in 3Q2019. We have an average CPO price assumption of RM2,100/tonne for Malaysia in 2019F (1H2019: RM1,996/tonne, 2018: RM2,235/tonne).

Source: AmInvest Research - 11 Jul 2019