• The Malaysian Palm Oil Board (MPOB) has released the country’s palm oil statistics for June 2020. Malaysia’s palm inventory fell by 6.3% to 1.90mil tonnes as at end-June from 2.03mil tonnes as at end-May. The palm inventory of 1.90mil tonnes as at end-June was within Bloomberg consensus estimates of 1.91mil tonnes. The MoM decline in palm inventory in June was due to a 24.9% surge in exports, which offset a 14.2% climb in production.
• We believe that Malaysia’s palm inventory would rise above 2mil tonnes in the coming months as the country enters the peak production period. The highest level of CPO production is expected to take place either in October or November. 2H usually accounts for 51% to 55% of industry CPO production for the full year while 1H usually makes up 49% to 45%. The highest level of palm inventory in Malaysia of 3.22mil tonnes was recorded in December 2018. Average palm inventory in Malaysia was 2.5mil tonnes in the past two years.

• Malaysia’s CPO production climbed by 14.2% to 1.89mil tonnes in June from 1.65mil tonnes in May driven by Peninsular Malaysia. CPO output in Peninsular Malaysia surged by 24.5% MoM to 1.08mil tonnes in June after falling by 7.0% MoM in May. On the other hand, CPO production in Sabah edged down by 0.5% MoM to 449,614 tonnes in June. In Sarawak, CPO output rose by 7.2% to 353,534 tonnes in June from 329,880 tonnes in May.

• Malaysia’s CPO production fell by 7.5% YoY to 9.05mil tonnes in 1H2020 as FFB yields in 1Q2020 were affected by the lagged impact of the drought and haze that took place in 3Q2019. We believe that FFB yields were also hurt as smallholders reduced fertiliser application in 2019. Smallholders are estimated to account for 30% to 40% of Malaysia’s CPO production. The MPOB expects CPO output in Malaysia to be 19.0mil tonnes in 2020E vs. 19.9mil tonnes in 2019.

• Malaysia’s palm exports improved by 24.9% to 1.71mil tonnes in June from 1.37mil tonnes in May. The MoM expansion in palm exports in June was driven by a 55.6% increase in demand from China and 347.7% jump in shipments to India. We think that China and India’s restocking of palm oil may end in a few months’ time. Thereafter in 4Q2020, China’s palm demand may taper off as the winter season sets in. India’s purchases may ease as inventory of edible oils starts to normalise. According to an industry expert in India, inventory of edible oils in India stood at 580,000 tonnes as at end-May 2020 compared to the monthly average of 900,000 tonnes to 1mil tonnes.

• Malaysia’s domestic disappearance of palm oil rose by 5.8% MoM to 366,318 tonnes in June. Domestic disappearance of palm oil was flat YoY at 1.84mil tonnes in 1H2020. We believe that there was no growth in the domestic usage of palm oil in 1H2020 as the movement control order in March and April 2020 had affected biodiesel activities.

• We are NEUTRAL on the plantation sector. Our average CPO price assumption is RM2,300/tonne for 2020E. Average MPOB spot price was RM2,482/tonne in 1H2020 compared with RM1,996/tonne in 1H2019.

Source: AmInvest Research - 13 Jul 2020