Investment Highlights

• Looking at export trends. We look at the export trends of Malaysian palm products from 2011 to 2021 in this report. We find that: (1) Malaysia’s palm export volumes are driven mainly by production trends. If CPO production drops, so will exports. Malaysia’s CPO exports fell by 3.2% from 2011 to 2020 as CPO production inched down by 1.2% ; (2) the percentage of China’s contribution to Malaysia’s palm exports has been falling, (3) India’s contribution has been increasing, (4) free trade agreements make a difference, (5) export volumes to the EU have been declining,and (6) palm demand from Africa and Turkiye is growing.

• Palm demand is partly supply-driven. We believe that the growth of Malaysia’s CPO exports is constrained by stagnating production. From 2011 to 2020, Malaysia’s CPO output edged down by 1.2% to 18.1mil tonnes. Since reaching a high of 20mil tonnes in 2015, CPO production has been fluctuating between 19mil and 20mil tonnes annually. In 2021, Malaysia’s CPO production reached a low of 15.6mil tonnes dragged by labour shortage.

• Ukraine-Russia war upended export trends in 2022. Due to the war in Ukraine and Indonesia’s temporary export ban, 2022 turned out to be an exceptional year for Malaysian palm oil. The Ukraine-Russia war prompted EU to switch to palm oil from sunflower oil temporarily while Indonesia’s ban on crude and refined palm oil in May 2022 resulted in Malaysia briefly gaining market share in India and China.

• China has been buying less from Malaysia. China accounted for 12% of Malaysia’s palm export volumes in 2021 compared with 22% in 2011. China’s imports of Malaysian palm products declined by 46% to 1.9mil tonnes in 2021 from 4mil tonnes in 2011. This was the opposite of the 12% increase in China’s imports of palm products from 2011 to 2021. The highest level of China’s palm imports was 8.5mil tonnes in 2019.

• Competition from Indonesia in China. We believe that China has been buying more palm oil from Indonesia at the expense of Malaysia. We attribute this to Indonesia’s cheaper CPO price and larger palm supply. Since 2010, the discount between CPO prices in Malaysia and Indonesia has widened from RM300/tonne to more than RM1,000/tonne. According to Intertek, Indonesia’s palm export volumes to China climbed by 82.3% to 4.4mil tonnes in 2021 from 2.4mil tonnes in 2014.

• On a positive note, India has been buying more from Malaysia. Malaysia’s palm export volumes to India surged by more than 2-fold to 3.6mil tonnes in 2021 from 1.7mil tonnes in 2011. India made up 23.1% of Malaysia’s palm exports in 2021 against 9.3% in 2011.

• India’s palm consumption is healthy. Malaysia benefited from India’s strong consumption patterns. According to the UN, India is set to overtake China as the world’s most populous nation in 2023F. Also, Indonesia imposes high CPO export tax and levy, which impede exports. India buys mainly palm oil in crude form as feedstock for its palm refineries. According to the Solvent Extractors Association of India, India bought 6mil tonnes of crude palm oil in 2020/2021 compared to 1.8mil tonnes of refined palm olein. Indonesia’s palm exports to India grew by 25.3% from 2014 to 2021 vs. Malaysia’s 11.2% increase. Given the smaller size of Malaysia’s CPO production, its export growth to India is not as strong as Indonesia.

• Free trade agreement spurred higher demand from Turkiye. The Free Trade Agreement (FTA) between Turkiye and Malaysia came into force on 1 August 2015. Under the FTA, 94% of Turkiye’s exports and 47% of Turkiye’s imports from Malaysia are granted duty-free status. Also, there is a 30% duty reduction for palm products from Malaysia. As a result, palm products from Malaysia are taxed at a lower rate compared to other countries. Under the amended FTA signed in 2022, 99% of Turkiye’s exports and 86% of its imports to/from Malaysia will be duty-free on 1 January 2023.

• Exports to Turkiye have been rising since 2015. Malaysia’s palm exports to Turkiye jumped to 398,729 tonnes in 2015 from a mere 77,564 tonnes in 2014. From 2015 to 2021, Malaysia’s palm exports to Turkiye expanded by 76.5% to 703,588 tonnes from 398,729 tonnes.

• EU’s palm imports from Indonesia rose in contrast to the fall in Malaysia. Malaysia’s palm export volumes to the EU fell by 30.5% to 1.6mil tonnes in 2021 from 2.4mil tonnes in 2014 (excluding the UK). In contrast, Indonesia’s palm exports to the EU rose by 29.1% to 5.3mil tonnes in 2021 from 4.1mil tonnes in 2014, according to Intertek. We attribute EU’s preference for Indonesian palm products to their cheaper prices and larger biodiesel supply.

• EU’s palm demand will decline going forward. In December 2022, the European Commission said that palm oil would account for only 9% of biodiesel output in 2032F compared with 23% in 2019/2021. EU’s palm imports are expected to fall to 3.3mil tonnes in 2032F from 6mil tonnes in 2020/2022.

• Palm biodiesel will be phased out in the EU. Recently, the EU said that commodities including palm oil, which come from deforested areas will be banned. Also, the EU will be phasing out palm biodiesel to zero by 2030F. We believe that EU’s demand for dieselwouldfall as the increasing use of electric vehicles. In October 2022, the EU said that car makers must achieve a 100% reduction in carbon emissions by 2035F, which would make it impossible for auto companies to sell fossil fuel-powered vehicles. In response to this, Volkswagen said that it would only produce electric cars in Europe from 2033F onwards.

• Africa is a growth market. Africa has potential due to its growing population. It could replace the loss of palm demand from the EU in the future. Africa’s population is forecast to increase to 2.5bil in 2050F from 1.4bil in 2021. Malaysia’s palm exports to Africa surged by 39.7% to 2.6mil tonnes in 2021 from 1.9mil tonnes in 2011. In Africa, Kenya was the largest buyer of Malaysian palm products, accounting for 4.3% of export volumes in 2021.

• Palm demand to remain resilient over the long-term. In spite of challenges, we reckon that palm demand would sustain over the long-term as cooking oil is a staple and not a discretionary product. In addition, it would take time for synthetics to replace palm oleochemicals in household and pharmaceutical products. We also believe that newer markets such as Africa and the Middle East have the potential to replace falling demand from traditional markets such as China and the EU.

• NEUTRAL. We are NEUTRAL on the palm oil sector as improving palm supply is expected to exert downward pressure on CPO prices. Our average CPO price assumptions are RM3,000/tonne for the large planters and RM3,500/tonne for the pure Malaysian players in 2023F.Our CPO price assumption is lower for large companies as it accounts for the Indonesian price discount of RM500/tonne to RM1,000/tonne.

Source: AmInvest Research - 29 Mar 2023