• The Malaysian Palm Oil Board (MPOB) has released the country’s palm oil statistics for October 2017. Palm inventory in Malaysia rose by 8.4% from 2.02mil tonnes as at end-September to 2.19mil tonnes as at end-October. This was marginally below consensus estimates of 2.2mil tonnes. The palm inventory of 2.19mil tonnes was the highest since January 2016. The highest level of palm stockpiles was 2.91mil tonnes in the past five years. This was recorded in November 2015. The lowest was 1.46mil tonnes, which were registered in August 2016 and February 2017.
• The MoM increase in palm inventory in October was due mainly to a 12.9% expansion in CPO production. Exports’ growth was unexciting at 2.0% in October. Although palm imports declined and domestic disappearance rose, these could not prevent palm stockpiles from increasing in October.
• Palm imports by downstream companies in Malaysia surged by 121.8% from 434,245 tonnes in 10M2016 to 962,944 tonnes in 10M2017. Palm imports shrank by 43.5% MoM to 49,436 tonnes in October. We reckon that oleochemical companies are importing raw materials from Indonesia as they are cheaper than those in Malaysia. We believe that CPO price in Indonesia is RM200/tonne to RM300/tonne lower than in Malaysia due to higher logistics and transportation costs.
• Domestic disappearance of palm oil rose by 17.8% from 2.38mil tonnes in 10M2016 to 2.8mil tonnes in 10M2017. On a monthly basis, domestic disappearance of palm oil increased by 25.5% from 270,905 tonnes in September to 339,952 tonnes in October. As mentioned in previous reports, we are unable to ascertain the reason behind the increase in domestic disappearance as the implementation of the B10 biodiesel policy in Malaysia has been delayed.
• CPO production in Malaysia expanded by 13.1% YoY to 16.1mil tonnes in 10M2017. We believe that Malaysia's palm oil production would be able to meet consensus estimates of 19.5mil tonnes for 2017E. On a monthly basis, CPO output improved by 12.9% from 1.78mil tonnes in September to 2.01mil tonnes in October. CPO production in Sarawak and Sabah climbed in October after falling by 2.9% and 2.0% MoM respectively in September. Sarawak achieved a 9.8% MoM rise in CPO output in October while Sabah registered a 18.0% increase. CPO production in Peninsular Malaysia expanded by 11.8% MoM to 1.08mil tonnes in October.
• Palm exports improved by 2.9% YoY in 10M2017 compared with the 13.1% increase in production. After falling in 2016, Malaysia's palm exports to China inched up by 2.2% YoY in 10M2017. Demand from India was weak this year as reflected in the 28.2% YoY contraction in 10M2017. Countries which imported significant amount of palm oil from Malaysia this year were Turkey and Iran. Malaysia's palm exports to Turkey surged by 9.6% YoY in 10M2017 after the implementation of the Free Trade Agreement while palm exports to Iran expanded by 34.0%.
• India was the largest buyer of Malaysia's palm products in 10M2017, accounting for 13.2% exports. This was followed by China, which accounted for another 11.2% of Malaysia's exports and Pakistan, which made up an additional 6.2% of Malaysia's palm exports. Turkey was the fifth biggest importer of Malaysia's palm products. Turkey accounted for 4.1% of Malaysia's exports in 10M2017. We are NEUTRAL on the outlook for the plantation sector in 2H2017. We have assumed an average CPO price of RM2,650/tonne for 2018F vs. RM2,700/tonne for 2017E. We believe that weak CPO production would sustain CPO price at its current levels of RM2,600/tonne to RM2,800/tonne. We have BUYs on Genting Plantations and TSH Resources, with fair values of RM11.50/share and RM1.90/share respectively.

Source: AmInvest Research - 13 Nov 2017