Malaysia’s palm oil inventories fell more than expected to its lowest level in 10 months in March as exports jumped despite a rise in production. At the point of writing, CPO futures tumbled RM82/mt to RM4,200/mt. YTD, the CPO price averaged at RM4,063/mt. Despite the recent rally in CPO price, we expect to retrace in the subsequent months as production starts to pick up. Top picks are pure planters, namely, Sarawak Plantation and Ta Ann.

• Inventories down for 5th straight session. Palm oil inventories recorded a drop of 10.7% MoM to 1.71m mt in March compared to the market estimates of 1.76m mt. It was also the lowest level in 10 months. Consequently, the stock/usage ratio slipped from 11.5% to 8.8% as exports grew at a bigger pace than production.

• Steepest export growth in a year. Palm oil exports jumped 28.6% MoM to 1.31m mt in March, bolstered by stronger demand from China (+1.4%), India (+42.6%), Middle East (+10.6%) and the US (+178.5%), partially offset by EU (-14.5%). For the first quarter, palm oil exports slipped 1.6% YoY to 3.69m mt, weighed by slower exports to all the major consuming countries. Despite the strong export data in March, we think it may not be sustainable in the coming months due to the uncompetitive pricing compared to other vegetable oils and low buying interest after the festive period.

• First monthly production gains in 5 months. CPO production rebounded 10.6% MoM to 1.39m mt in March, as production from both Peninsular Malaysia and East Malaysia rose 15% and 5.2%, respectively. It is also the monthly gain since Oct 2023. Meanwhile, FFB yield recovered from Feb’s 1.08mt/ha to 1.17mt/ha as productivity normalized after the long holiday break. We believe production is likely to see continuous recovery in the subsequent months led by higher productivity and easing worker shortage issue.

• Indonesia mulls revision for the DMO policy. Indonesian government is mulling a revision in the Domestic Market Obligation (DMO) policy for cooking oil by linking it to production instead of exports. It is worth noting that the current ruling allows companies to export some palm oil products after supplying certain volumes of cooking oil domestically. The current DMO cooking oil supply volume has been in declining trend since Aug with domestic cooking oil supply averaged at 271,000k mt/mth vs 300,000/mth target. The Indonesian palm oil companies have a total of 5.58m mt of export rights or equal to 2.5 months of shipments.

Source: PublicInvest Research - 16 Apr 2024