• The Malaysian Palm Oil Board (MPOB) has released the country’s palm oil statistics for July 2021. Malaysia’s palm inventory slid by 7.3% to 1.50mil tonnes as at end-July from 1.61mil tonnes as at end-June. The palm stockpiles of 1.50mil tonnes in July was 7.4% below Bloomberg consensus estimates of 1.62mil tonnes. The 7.3% MoM fall in palm inventory in July was due to a 5.2% drop in production, which outstripped the 0.8% drop in exports. Also, domestic disappearance of palm oil rose by 8.7% MoM to 303,164 tonnes in July while imports dived by 48.3%.
   
• Domestic disappearance improved in July in spite of the two-week EMCO in Selangor. We think that there may have been higher consumption of cooking oil in households in the Klang Valley in July. On a YoY basis however, domestic disappearance slipped by 3.6% to 2.08mil tonnes in 7M2021. We attribute this to lower transportation activities, which have affected biodiesel usage.

• Malaysia’s palm imports fell by 48.3% to 70,583 tonnes in July from 136,478 tonnes in June as Indonesia reduced the CPO export tax and levy. This narrowed the price differential between CPO in Malaysia and Indonesia. Comparing 7M2021 against 7M2020 however, palm imports surged by 57.7% to 0.9mil tonnes. Indonesia’s CPO export tax and levy amount to about US$268/tonne (RM1,134/tonne) in total in August vs. US$291/tonne in July and US$438/tonne in June. This means that the price discount between Malaysia and Indonesia would continue to be at least RM1,000/tonne.

• CPO production in Malaysia eased by 5.2% MoM to 1.52mil tonnes in July. We believe that this is an aberration and CPO output would start recovering in August. The 5.2% MoM fall in CPO production in July was due to a 9.7% decline in Sabah and 6.9% slide in Sarawak. In Peninsular Malaysia, CPO output edged down by 2.5% MoM to 857,822 tonnes in July. Comparing 7M2021 against 7M2020, Malaysia’s CPO production decreased by 8.9% to 9.9mil tonnes due to the wet weather in 1Q and shortage of labour. Oil World estimates that Malaysia’s CPO output would fall by 500,000 tonnes in 2021E from 2020’s 19.14mil tonnes.

• Malaysia’s palm exports inched down by 0.8% MoM to 1.41mil tonnes in July dragged by a 23.1% plunge in demand from China and 19.8% fall in shipments to India. On a positive note, the Netherlands’ demand for Malaysia’s palm products surged by 76.9% MoM to 120,846 tonnes in July.

• We believe that Indian buyers are switching to Indonesia from Malaysia due to Indonesia’s price discount. Malaysia’s palm exports to India fell by 27.8% MoM in June and 19.8% MoM in July. Recall that in June, India reduced the base import duty on CPO, which resulted in the total import duty falling to 30.25% from 35.75%. Also, we reckon that China’s palm demand would be soft going forward as there is an abundance of vegetable oils supply after the surge in soybean and palm imports in 1H2021. China’s soybean and palm imports rose by 12.8% and 23.4% YoY respectively in 5M2021.

• We are NEUTRAL on the plantation sector due to ESG concerns and risk that CPO prices would soften due to rising production. Our 2021E CPO price assumption is RM3,000/tonne for the plantation companies in our coverage. This is lower than the year-to-date average spot price of RM3,671/tonne due to forward sales at weaker prices and the Indonesia price discount. We would be reviewing the fair values of the companies in our coverage as theshare prices have fallen sharply below our target prices.

Source: AmInvest Research - 12 Aug 2021