Palm oil inventories in Malaysia ended Aug with an increase of 7.3% MoM to 1.88m mt, which was higher than consensus estimate of 1.86m mt. In view of higher production in the subsequent months and the unattractive gap between palm oil-soybean oil prices, we expect inventory level rise further, which may not bode well for the CPO price in the near-term. At the point of writing, CPO futures slipped RM2 to RM3,893/mt. YTD, CPO price averaged at RM4,011/mt. Maintain Neutral on the sector with a full-year CPO price assumption of RM3,800/mt.
- Steepest inventory growth in 11 months. Palm oil inventories recovered in Aug, up 7.3% MoM to 1.88m mt compared to market estimates of m mt. It was also the highest level in six months. Consequently, the stock/usage ratio grew from 7.6% to 8.8% as exports slipped while production saw a pick up for the second month.
- Exports pulled back. Following a sharp rise in the previous month, palm oil exports dropped 9.7% MoM to 1.52m mt in Aug, dragged by weaker exports to China (-23.7%), the EU (-23.4%), India (-24.1%) and the Middle East (-36.8%) despite a surge in demand from the US (+106.4%).
- Production up for second straight month. CPO production rose 2.9% MoM to 1.89m mt, led by stronger production from Peninsular Malaysia (+0.4%) and East Malaysia (+6.5%). For the first 8 months, production totaled 12.6m mt, up 10.2% YoY.
- Palm oil price is on par with soybean oil. We expect softer demand for CPO in the coming months amid intensifying competition from rival soybean oil. Soybean oil’s premium over palm oil has become zero now, compared with a high of USD565/mt in the past 12 months, partly due to a slump in soybean oil prices while palm oil prices gained 4.4% YTD. At the point of writing, soybean oil price was trading at a discount of USD2/mt to CPO, which is an unusual phenomenon. Due to that, Indonesia, the world largest palm oil producer, plans to lower export levy rates with simpler price brackets to improve competitiveness against rival vegetable oils. Currently, Indonesia imposes a levy between USD55- 240/mt for CPO exports, depending on global palm oil prices, which is imposed on top of a separate export tax.
Source: PublicInvest Research - 11 Sept 2024