• The Malaysian Palm Oil Board (MPOB) has released the country’s palm oil statistics for August 2017. Palm inventory in Malaysia climbed by 8.8% from 1.78mil tonnes in July to 1.94mil tonnes in August. This was below consensus estimates of 2mil tonnes. Average monthly palm inventory in Malaysia was 2.02mil tonnes in the past five years. The highest level of palm inventory ever achieved in Malaysia was 2.91mil tonnes in November 2015. The MoM increase in palm inventory in Malaysia in August was mainly due to the high carry-over stocks from the previous month and an 8.5% drop in internal usage or domestic disappearance of palm oil.

• Domestic disappearance of palm oil amounted to 2.19mil tonnes in 8M2017 compared with 1.91mil tonnes in 8M2016. On a monthly basis, domestic disappearance of palm oil shrank by 8.5% from 282,391 tonnes in July to 258,470 tonnes in August. We are unsure of the reason behind the surge in domestic disappearance as the implementation of the B10 biodiesel policy has been delayed in Malaysia. We believe that palm stockpiles in Malaysia would have been significantly higher without the sizeable volume of domestic disappearance in 8M2017.
• Imports of palm oil by downstream companies in Malaysia jumped by 126.0% from 365,505 tonnes in 8M2016 to 825,950 tonnes in 8M2017. Palm imports declined by 16.7% MoM to 92,615 tonnes in August. We believe that the increase in palm imports by Malaysian downstream companies in 8M2017 is due to the cheaper price of raw materials from Indonesia. Price of CPO in Indonesia is estimated to be RM200/tonne to RM300/tonne lower than CPO in Malaysia currently.
• After a 20.7% MoM jump in palm production in July, Malaysia recorded a marginal decline of 0.9% in output in August. Recall that industry palm production was abnormally high in July as workers returned to the estates after the Hari Raya festivities in June. Palm output in Peninsular Malaysia edged down by 0.7% MoM to 980,377 tonnes in August while Sabah recorded a 5.3% fall in production. On the other hand, palm production in Sarawak improved by 3.8% from 378,159 tonnes in July to 392,429 tonnes in August.
• CPO production in Malaysia increased by 13.6% YoY to 12.4mil tonnes in 8M2017. The MPOB has forecast Malaysia's CPO production to be 19.4mil tonnes in 2017F (2016: 17.32mil tonnes) while Oil World estimates the country's CPO output to be 19.85mil tonnes.
• The 6.4% MoM increase in palm exports in August was underpinned mainly by China, India and Turkey. China's demand for Malaysia's palm oil rose by 2.9% MoM in August while India imported 13.5% more palm oil. Also, Malaysia's palm exports to Turkey climbed by 64.6% MoM to 70,309 tonnes in August. All these helped compensate for a 17.2% decline in demand from European Union and 11.9% fall in exports to Pakistan.
• Biodiesel exports slid from 50,580 tonnes in July to 12,375 tonnes in August. Biodiesel exports amounted to 197,987 tonnes in 8M2017 vs. 69,438 tonnes in 8M2016. Going forward, biodiesel exports may decline as fossil fuel is cheaper than CPO.
• We are neutral on the outlook for the plantation sector in 2H2017. Palm inventory may continue to rise on the back of higher palm production in 2H2017. Industry palm output may peak in either 3QFY17 or 4QFY17 before tapering off towards year-end. We have BUYs on IJM Plantations and TSH Resources with fair values of RM3.40/share and RM1.90/share respectively.

Source: AmInvest Research - 12 Sept 2017