Malaysia’s palm oil industry witnessed another decline in CPO inventories as production continued to drop amid low production season. Nevertheless, the drop in inventories was less than market expectations, pointing a reason for profit-taking in CPO futures. At the point of writing, CPO futures retreated RM125/mt to RM6,949/mt. We maintain Overweight on the plantation sector with a full-year CPO price forecast of RM4,300/mt. Our top picks are Sarawak Plantation and Ta Ann.
Palm oil inventories fell less than expected. Comparing to market estimates of an 11.4% drop, palm oil Inventories in Feb 22 slipped only 2.1% MoM to a 7-month low of 1.51m mt, as production fell at a steeper pace than exports. Meanwhile, stock-to-usage ratio rose from 9.3% to 9.6%.
- Exports down for third straight month. Palm oil exports softened by 5.2% MoM to 1.1m mt. The weak exports were mainly attributed to a decline in exports demand from EU (-8.2%) and India (-18.3%) which were partly offset by better demand from China (+17.2%), Pakistan (+72.3%) and US (+110.3%).
- Output continued to fall amid low production season. CPO production, which has been affected by severe labour shortages and flooding as well as short production month, contracted 9.3% MoM to one year low of 1.1m mt. Production from Peninsular Malaysia and East Malaysia slipped 1% and 17.9%, respectively.
- Tighter palm oil supplies. Indonesia decided to increase its Domestic Market Obligation percentage to 30%, up from 10% from the previous mandate, which will further restrict exports of palm oil from 10 March onwards to increase domestic supplies, in a bid to limit the rising domestic cooking oil prices. This will require palm oil exporters to sell 30% of their committed exports of CPO and palm olein domestically at a price ceiling of 9,300 rupiah (USD0.65)/kg for CPO and 10,300 rupiah (USD0.72)/kg for palm olein. 30% of the CPO export commitment would translate into 720,000mt (based on 2021’s exports of 2.4m mt), which is partly sufficient to subsidize the annual domestic cooking oil requirement of 3.6m litre or 6m mt of CPO.
Source: PublicInvest Research - 11 Mar 2022