Malaysia’s palm oil industry began 2023 with a weak set of data as stockpile rose 3.3% MoM on the back of weaker exports, tumbling 23% YoY. It was the first monthly increase in stockpile since Oct and a jump of 46% from a year earlier. At the point of writing, palm oil futures dropped RM30 to RM3,934/mt. Maintain Neutral on the sector with a full-year CPO price forecast of RM3,800/mt. Our preferred buys are Genting Plantations, Sarawak Plantation, Ta Ann and TSH.

• Palm oil stockpile rebounded. Given the sharp decline in exports amid weak production season, palm oil stockpile saw its first gain in three months, up 3.3% MoM to 2.26m mt. A jump in palm oil imports also contributed to the higher inventory levels. Stock-to-usage ratio climbed from 10.4% to 13%.

• Sharp decline in exports. Palm oil exports tumbled 23% MoM to 1.13m mt, dragged by weaker demand from all major consuming countries, namely, China (-83.9%), EU (-12.9%), India (-43.2%), Pakistan (-55.3%) and US ( -49.7%). We think the softer shipments to India is likely due to the current record inventory levels and importers need to rationalize purchases as most storage facilities are overflowing with palm oil.

• Higher production. With the arrival of more foreign workers, palm oil production recovered by 10% YoY to 1.38m mt, led by stronger contribution from both Peninsular Malaysia (+11.1%) and East Malaysia (+9%). Meanwhile, FFB yield inched up from 1.1mt/ha to 1.19 mt/ha.

• Expecting lower palm oil exports from Indonesia. The Indonesian government has recently urged the local cooking oil producers to ramp up palm oil supply to the domestic market by 50% to 450,000 mt for the next 3 months to meet rising demand ahead of the festive celebration. Meanwhile, the recent introduction of B35, which contains 35% palm-oil based biofuel and 65% diesel, is expected to increase consumption of fatty acid methyl ester, the fuel made from palm, to 13.15m kilolitres, up from last year’s 10.4m kilolitres. The higher biodiesel consumption is expected to consume 11m of CPO, up from 9.6m mt of CPO last year. It expects to see smaller increase in palm oil output, up from 51.2m mt in 2022 to 52.5m mt this year due to higher fertiliser prices. Lastly, the implementation of the B35 program can save up to USD10.75bn (RM45bn) in forex as some of which were used to buy imported fuel.

Source: PublicInvest Research - 13 Feb 2023