• The Malaysian Palm Oil Board (MPOB) has released the country’s palm oil statistics for February 2020. Palm inventory in Malaysia slid for the fifth month in a row. Palm stockpiles in Malaysia fell by 4.2% to 1.68mil tonnes as at endFebruary from 1.76mil tonnes as at end-January 2019. The inventory of 1.68mil tonnes was the lowest level since June 2017. Consensus had estimated Malaysia’s palm inventory to be 1.76mil tonnes in February. The 4.2% MoM fall in palm inventory in February was mainly due to higher domestic disappearance and lower imports.
• Going forward, we expect palm inventory to rise in line with the recovery in production. Malaysia’s CPO production unexpectedly rose by 10.0% MoM to 1.29mil tonnes in February. Based on historical trends, industry CPO output usually picks up from March onwards. We think that after falling for four months since October 2019, industry FFB yields are recovering. The improvement in CPO production in February was led by Peninsular Malaysia. FFB yield in Peninsular Malaysia increased to 1.16 tonnes/ha in February from 0.98 tonnes/ha in January. As a result, CPO output in Peninsular Malaysia climbed by 25.0% MoM to 707,897 tonnes in February 2020. CPO production in Sabah inched up by 0.5% MoM to 318,537 tonnes in February while in Sarawak, CPO output slid by 9.0%.

• Malaysia’s CPO production contracted by 25.0% YoY to 2.46mil tonnes in 2M2020. Industry experts have forecast Malaysia’s CPO production to be 20mil to 20.5mil tonnes in 2020F (2019: 19.9mil tonnes).

• Malaysia’s palm exports fell by 23.5% YoY to 2.3mil tonnes in 2M2020. Comparing February against January 2020, Malaysia’s palm exports declined by 10.8% to 1.08mil tonnes. India’s imports of Malaysia’s palm products dived by 91.1% YoY to 68,006 tonnes in 2M2020 while exports to China slid by 16.5%. On a monthly basis, Malaysia’s palm exports to India dropped by 54.9% to 21,130 tonnes in February while China’s imports of Malaysia’s palm products eased by 11.3%. We believe that slower consumer spending and economic activities resulting from Covid-19 affected China’s demand for palm oil in February.

• Domestic disappearance of palm oil rose by 7.6% YoY to 695,865 tonnes in 2M2020. On a monthly basis, domestic disappearance of palm oil went up 12.9% to 369,040 tonnes in February 2020. We attribute the increase in domestic disappearance of palm oil in February to a pick-up in biodiesel activities after the Chinese New Year festivities in January.

• Malaysia’s palm imports declined by 3.4% YoY to 202,772 tonnes in 2M2020. Comparing February against January 2020, the country’s palm imports shrank by 21.7% YoY to 89,055 tonnes. We believe that downstream companies in Malaysia would be importing lesser palm feedstock from Indonesia going forward as Indonesia’s CPO is more expensive than Malaysia. We estimate CPO price in Indonesia to be 2.8% or RM66/tonne higher than Malaysia’s currently.

• We maintain UNDERWEIGHT on the plantation sector. Our average CPO price assumptionisRM2,300/tonne for 2020F. Average MPOB spot price was RM2,864/tonne in 2M2020. Currently, MDEX CPO price of RM2,339/tonne for March is 8.8% lower than the price of US soybean oil. The monthly average discount between the two commodities was 19.3% in the past five years.

Source: AmInvest Research - 11 Mar 2020