• The Malaysian Palm Oil Board (MPOB) has released the country’s palm oil statistics for the month of July 2019. Palm stockpiles in Malaysia slid for the fifth month in a row. Palm inventory in Malaysia eased by 0.8% to 2.39mil tonnes in July from 2.41mil tonnes in June. Out of the 2.39mil tonnes of inventory in July, 1.06mil tonnes were processed palm oil while the balance 1.34mil tonnes were palm oil in crude form. The unexpected MoM decline in palm stockpiles in July 2019 can be attributed to a 54.8% drop in imports and 13.9% surge in domestic disappearance. Malaysia’s palm inventory of 2.39mil tonnes in July was below consensus estimates of 2.47mil tonnes.
• Domestic disappearance of palm oil was high at 328,271 tonnes in July compared with 288,245 tonnes in June. Domestic disappearance of palm oil has consistently ranged between 200,000 and 350,000 tonnes every month. Without the domestic disappearance of palm oil, we believe that palm inventory in Malaysia would have been a lot higher. We attribute the domestic disappearance of palm oil to the implementation of the B10 biodiesel policy in the transportation sector and the B7 biodiesel policy in the industrial sector. Domestic disappearance of palm oil climbed by 18.4% to 2.17mil tonnes in 7M2019 from 1.83mil tonnes in 7M2018.

• Palm imports slid by 54.8% MoM to 56,062 tonnes in July. However on a YoY basis, palm imports climbed to 676,840 tonnes in 7M2019 from 431,763 tonnes in 7M2018. Going forward, the price discrepancy between CPO in Malaysia and Indonesia may widen if the peak production period in Indonesia in 2H2019 turns out to be higher than expected. This may result in Malaysia’s palm imports rising again in the next few months as downstream companies in Malaysia switch to cheaper feedstock from Indonesia.

• CPO production surged by 15.1% MoM to 1.74mil tonnes in July. The jump in CPO production was not surprising as in June, the harvesting of fruits was affected by the Hari Raya holidays. We believe that CPO output would continue to rise in 2H2019 and reach its highest level in October or November. Malaysia’s CPO production grew by 10.6% YoY to 11.52mil tonnes in 7M2019. Oil World has forecast Malaysia’s CPO output to rise by 4.0% to 20.3mil tonnes in 2019E from 19.52mil tonnes in 2018.

• Malaysia’s palm exports increased by 13.8% YoY to 10.86mil tonnes in 7M2019. This was driven mainly by India, which imported 99.9% more palm oil from Malaysia. China’s demand was also robust as reflected in the 12.3% increase in imports. India accounted for 28% of Malaysia’s palm exports in 7M2019 while China made up another 10.1%. In spite of the negative campaigns against palm oil, the EU’s imports of Malaysia’s palm products rose by 6.2% YoY in 7M2019. The EU accounted for 11.7% of Malaysia’s palm exports in 7M2019.

• Our recommendation on the plantation sector in 2H2019 is UNDERWEIGHT as CPO prices are expected to be unexciting. Although CPO prices have risen in the past month, we reckon that any upside would be capped by rising inventories. We expect palm inventory in Malaysia to increase from August onwards on the back of expanding production. We have an average CPO price assumption of RM2,100/tonne for Malaysia in 2019E (2018: RM2,235/tonne).

Source: AmInvest Research - 14 Aug 2019