• The Malaysian Palm Oil Board (MPOB) has released the country’s palm oil statistics for December 2017. Palm inventory in Malaysia increased by 7.0% from 2.56mil tonnes as at end-November to 2.73mil tonnes as at end-December 2017. This was marginally above consensus estimates of 2.69mil tonnes. The MoM increase in palm inventory in December 2017 was largely due to the high carryover stockpiles from November and a drop in domestic disappearance or consumption.
• The palm inventory of 2.73mil tonnes in December 2017 was the highest since December 2015. Average palm inventory in Malaysia was 1.87mil tonnes in 2017 compared with the 10-year average of 1.9mil tonnes. The highest level of palm stockpiles in Malaysia was 2.91mil tonnes, which was recorded in November 2015.
• Although CPO production may taper off in 1Q2018 after peaking in October 2017, we believe that palm inventory in Malaysia may stay above 2mil tonnes due to the high level of inventory carried over from December. Nevertheless, the government's recent abolishment of the export tax on crude palm oil may help boost exports and prevent palm inventory from exceeding 2.9mil tonnes.
• Although Malaysia is a producer of palm oil, palm imports surged in 2017. We believe that downstream companies in Malaysia bought palm oil from Indonesia as feedstock for their oleochemical and refining operations. Price of CPO in Indonesia is lower by RM200 to RM300/tonne compared with Malaysia due to their higher infrastructure and transportation costs. Imports of palm oil in Malaysia climbed by 89.0% from 574,730 tonnes in 2016 to 1.09mil tonnes in 2017. Comparing December against November 2017, palm imports slid by 49.3% to 41,401 tonnes.
• Domestic disappearance of palm oil went up by 19.6% from 2.8mil tonnes in 2016 to 3.4mil tonnes in 2017. The domestic disappearance of 3.4mil was about 17.1% of Malaysia's CPO output of 19.92mil tonnes in 2017. We do not know the reason for the surge in the domestic usage or hoarding of palm oil. After all, the implementation of the B10 biodiesel policy in Malaysia has been delayed. On a monthly basis, domestic disappearance of palm oil shrank by 13.6% to 274,724 tonnes in December 2017.
• CPO production in Malaysia rose by 15.0% from 17.32mil tonnes in 2016 to 19.92mil tonnes in 2017 on the back of a recovery in FFB yields. In 2016, FFB yields were affected by the lagged impact of El Nino, which took place in 2015. Comparing December against November 2017, CPO output in Malaysia eased by 5.6% to 1.83mil tonnes. Sarawak recorded a 9.1% MoM fall in CPO production in December 2017. In Sabah, CPO output contracted by 4.8% MoM to 490,053 tonnes in December while CPO production declined by 4.7% in Peninsular Malaysia.
• Oil World has forecast CPO production to improve by 3.4% to 20.6mil tonnes in Malaysia and 5.5% to 38.3mil tonnes in Indonesia in 2018F.
• Palm exports expanded by 3.3% from 16.03mil tonnes in 2016 to 16.55mil tonnes in 2017. This was driven mainly by Pakistan, which bought 15.5% more palm oil from Malaysia and the Philippines, which imported 20.3% more. These helped compensate for a 28.3% fall in exports to India in 2017. In spite of the decline in demand, India remained the largest buyer of Malaysia's palm products in 2017, accounting for 12.2% of exports. This was followed by China (11.6%), Pakistan (6.14%), the Netherlands (6.06%) and Turkey (4.1%). China's imports of Malaysia's palm oil improved by a small 1.9% in 2017.
• We are NEUTRAL on the outlook for the plantation sector in 1H2018. Our average CPO price assumption is RM2,650/tonne for 2018F vs. RM2,792/tonne achieved in 2017. We have a BUY on Genting Plantations with a fair value of RM11.50/share.

Source: AmInvest Research - 11 Jan 2018