Palm oil inventories in Malaysia unexpectedly dropped in July, down 5.4% month-on-month (MoM) to 1.73m mt as exports jumped nearly 40% MoM despite stronger production recorded. YTD, CPO price averaged at RM4,019/mt. In the near-term, we expect to see range-bound trading levels of RM3,600-3,800/mt in anticipation of strong production growth. At this point of writing, CPO futures stood at RM3,733/mt. Maintain Neutral on the sector with a full-year CPO price assumption of RM3,800/mt.

• Inventory saw the first decline in 4 months. Palm oil inventories retreated in July, down 5.4% MoM to 1.73m mt compared to market estimates of 1.85m mt. It was also the first monthly drop in 4 months. Consequently, the stock/usage ratio slipped from 9.9% to 7.4% as exports jumped despite stronger production recorded.

• A surge in exports. Palm oil exports jumped 39.9% MoM to 1.68m mt in July, bolstered by stronger demand from all major consuming countries, namely, China (+21.8%), the EU (+12%), India (+25.5%) and Middle East (+181.8%), though partially offset by weaker exports to the US (-57.9%). It was also the strongest monthly export growth since Sept 2018. We believe the stronger exports was likely due to restocking activities by India and China given the low inventory levels in both countries.

• Production regained momentum. CPO production rose 14% MoM to 1.84m mt, led by stronger production from Peninsular Malaysia (+13.9%) and East Malaysia (+15.3%). For the first 7 months, production gained 10.6% YoY to 10.7m mt. We expect the 2H production to account for at least 55% of our full-year production estimates of 19.5m mt.

• Indonesia’s palm oil DMO will not affect export ratio. Indonesia obliges producers to sell a portion of their output to the local market at a capped price in order to gain export permits. Export quota is currently set at four times the volume of palm oil that companies supply locally under the Domestic Market Obligation (DMO) scheme. Under the revision, the government plans to raise the cooking oil price cap for the domestic market as the current retail price has surpassed the cap that was set in 2022. Indonesia’s agenda of setting up the DMP scheme is aimed at ensuring 300,000 mt of cheap cooking oil is sold each month. However, the scheme has only achieved around half of that target in recent months due in part to a weak export market.

Source: PublicInvest Research - 13 Aug 2024