Palm oil inventories in Malaysia extended their gains in June with an increase of 4.3% to 1.82m mt, the highest level in 4 months. YTD, CPO prices averaged RM4,025/mt, compared to our full-year average target of RM3,800/mt. In view of higher production in the second half, we expect inventory to continue trending upward, which may consequently exert downward pressure on CPO prices. We expect to see range-bound trading levels of RM3,600-3,800/mt in the 2H. At the point of writing, CPO futures stood at RM3,876/mt. Maintain Neutral on the sector.

• Third straight month of gain in inventories. Palm oil inventories extended gains into June, up 4.3% MoM to 1.82m mt compared to market estimates of 1.83m mt. It was also the highest level since Feb 24. Consequently, the stock/usage ratio inched up from 8.5% to 9.8% as exports fell at a steeper pace than production.

• A reversal in export volume. Palm oil exports slipped 12.8% MoM to 1.20m mt in June, dragged by weaker demand from major consuming countries, namely, China (-21.2%), the EU (-7.2%) and India (-19.4%), partially offset by a surge in exports to the Middle East (+324%). We believe the weaker sales volume was likely due to a lack of buying interest given the narrower spread between soybean oil and palm oil prices.

• Production dipped for the first time in 4 months. CPO production slid 5.2% MoM to 1.61m mt, dampened by lower production from Peninsular Malaysia (-4.7%) and East Malaysia (-6%). We think the decline was due to temporary biological tree stress before seeing a strong production recovery in the second half. We expect the 2H production to account for at least 55% of our full-year production estimates of 19.5m mt.

• Palm oil might face stiffer competition from soybean oil. US soybean futures fell to the lowest since Nov 2020 following the US Department of Agriculture’s (USDA) projection on good-to-excellent conditions ratings for corn and soybean in the US planted area. The USDA estimated 68% of the crop was in good-to-excellent condition, up a point from 67% the previous week and still well ahead of last year’s 55%, while only 9% was rated poor to very poor. This indicated that US soybean production will see a bumper harvest in the coming months. The USDA projects 6.8% YoY growth to 121.1m mt of soybean production in 2024/2025. Currently, palm oil’s discount to soybean oil has narrowed to USD141.4/mt, the lowest since Feb 2022.

Source: PublicInvest Research - 11 Jul 2024