Malaysia’s palm oil inventory rose to an eight-month high of 1.77m mt in July, up 7.7% MoM or 18.4% YoY, as palm oil imports jumped. The rise is mildly bearish for CPO prices which could be under more pressure in subsequent months as production is expected to see stronger growth. A bright spot is the recent steep retracement in CPO prices which could attract more buying interest. In the upcoming quarterly results announcements, we expect to see mixed performances given the decline in production. Maintain Neutral on the sector as we expect to see CPO prices falling to RM3,800/mt by year-end.

• Palm oil inventory jumped to the highest level in 8 months. Palm oil stockpiles gained 8% MoM to 1.77m mt, which is in line with market estimates, led by increased palm oil imports and higher production. Stock-to-usage ratio rose slightly from 9.3% to 9.4%.

• Exports rebounded. Weaker palm oil exports to China (-42.7%), EU (- 41.5%) and Pakistan (-37.4%) were outpaced by stronger demand from India (+51.3%) and the US (+12.3%). It is also worth noting that exports to Iran (no.2), Philippines (no.3) and Kenya (no.4) saw big jumps, up 126,000 mt, 33,000 mt and 28,000 mt, respectively.

• Output grew for second straight month. Palm oil production hit the highest level in 8 months at 1.57m mt, up 1.8% MoM. The higher production was contributed by Peninsular Malaysia (+2.3%), with East Malaysia at +1.2%.

• More pressure from Indonesian counterparts. The top global producer recently saw a drastic cut in CPO palm oil export tax, down from USD288/mt in July to USD52/mt for 9-15 Aug. Combined with the maximum export levy of USD200/mt, the gap between Malaysian and Indonesian CPO price has narrowed substantially to USD152/mt (RM669/mt) compared to USD279/mt (RM1,226/mt) in Jan 2022.

• Expecting mixed bag of quarterly results. In view of the weaker production, we expect to see mixed performances in the upcoming quarterly results. 2Q 2022 average CPO price stood at RM6,453/mt, up 53.7% YoY.

Source: PublicInvest Research - 11 Aug 2022