• The Malaysian Palm Oil Board (MPOB) has released the country’s palm oil statistics for February 2018. Palm inventory in Malaysia fell for the second consecutive month as palm production shrank by 15.4% MoM in February. Palm inventory slid by 2.8% from 2.55mil tonnes in January to 2.48mil tonnes in February. Consensus was expecting Malaysia's palm stockpiles to be 2.39mil tonnes in February.
• We believe that Malaysia's palm stockpiles would rise from March or April 2018 onwards due to the recovery in production and a decline in exports. Palm exports may be hit by a fall in demand from India resulting from the hike in import duties on palm products. Malaysia's palm exports may also be affected if the country reinstates the export tax on CPO. Currently, exports of CPO are tax-free until 7 April 2018. The export tax was 5.5% on a reference CPO price of RM2,623/tonne in January 2018.
• Palm imports declined by 19.9% YoY to 122,538 tonnes in 2M2018. Going forward however, we expect palm imports to rise. We reckon that downstream companies would be buying cheaper CPO from Indonesia to improve their processing margins. This is because if the export tax on CPO is reinstated in Malaysia from April 2018 onwards, refineries would no longer be incentivised to sell palm oil in crude form. Instead, they would be processing and exporting refined palm oil again. On a monthly basis, palm imports surged by 121.2% to 84,384 tonnes from January to February 2018.
• CPO production in Malaysia grew by 15.5% YoY in 2M2018. Oil World is forecasting CPO output in Malaysia to improve by 4.2% from 19.92mil tonnes in 2017 to 20.76mil tonnes in 2018F. So far, plantation companies are guiding for higher CPO production in 2018F. Indofood Agri Resources expects its nucleus FFB production in Indonesia to increase by 5% to 10% in FY18F vs. 4% in FY17 while Felda Global Ventures is hopeful of achieving an FFB output growth of 13.8% in FY18F compared with 8.9% in FY17.
• Malaysia's palm exports rose by 18.1% YoY in 2M2018. Comparing February against January, palm exports slid by 13.3% to 1.31mil tonnes. The 18.1% YoY increase in exports in 2M2018 was driven mainly by an 88.8% rise in demand from India and 74.7% expansion in shipments to Pakistan. These helped compensate for a 3.2% fall in exports to China and 18.8% contraction in demand from the Philippines. Going forward, the demand outlook for palm from China and India is not positive. China is expected to record an increase in soybean oil supply, which may crimp palm imports. The country has been crushing huge amounts of soybean as feedmeal for the hog and cattle industry, and soybean oil supply is rising as it is a by-product of the crushing. Demand for palm oil from India is not envisaged to be exciting in the short term due to the hike in import duties on palm products.
• 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 - 13 Mar 2018