The Malaysian Palm Oil Board (MPOB) has released the country’s palm oil statistics for June 2018. Palm inventory in Malaysia edged up for the first time in five months in June. Palm inventory in Malaysia rose by 0.8% from 2.17mil tonnes as at end-May to 2.19mil tonnes as at end-June. This was above consensus estimates of 2.17mil tonnes. The higher than expected palm inventory in June was mainly due to a 12.6% MoM drop in exports and 124% MoM increase in imports.

We reckon that Malaysia’s palm inventory would continue to rise in line with the peak production season in 3Q2018. Historically, Malaysia achieved its highest palm production level in September or October while the highest inventory normally took place in either October, November or December.

CPO production in Malaysia declined by 12.6% MoM to 1.33mil tonnes in June as estate workers returned home for the Hari Raya festivities. CPO output in Sabah fell by 13.6% from 392,059 tonnes in May to 338,810 tonnes in June while in Peninsular Malaysia, CPO production shrank by 13.6%. CPO output in Sarawak slid by 9.2% from 342,986 tonnes in May to 311,346 tonnes in June. Comparing 1H2018 against 1H2017, CPO production in Malaysia rose by 2.3%. Oil World has forecast Malaysia’s CPO output to increase by 3.9% from 19.92mil tonnes in 2017 to 20.7mil tonnes in 2018F.

Malaysia’s palm exports improved by 6.6% YoY in 1H2018 vs. the 2.3% YoY increase in CPO production. Main buyers of Malaysia’s palm products in 1H2018 were India, China, Pakistan and Netherlands. Palm exports to India surged by 24.3% YoY in 1H2018 in spite of the hike in import tariffs in the beginning of the year. Palm shipments to China rose by 24.9% YoY in 1H2018 underpinned by re-stocking of vegetable oils ahead of the implementation of the 25% tariff on US soybeans on 6 July. On a MoM basis, Malaysia’s palm exports slid by 12.6% to 1.13mil tonnes in June.

Malaysia’s palm imports surged by 124.0% MoM to 97,246 tonnes in June. We understand that palm refiners and oleochemical companies in Malaysia are facing tight processing margins currently. Hence, the downstream companies may continue to import palm products from Indonesia as the prices in Indonesia are cheaper. We estimate the price differential between prices of CPO in Malaysia and Indonesia to be RM200/tonne to RM300/tonne presently.

We maintain our NEUTRAL stance on the plantation sector in 2H2018. We are assuming an average CPO price assumption of RM2,450/tonne for 2018F (2017: RM2,792/tonne). We believe that the financial results of plantation companies would be uninspiring in 2Q2018 due to weak CPO prices and lower CPO production. According to MPOB, average CPO price was RM2,380/tonne in 2Q2018 vs. RM2,467/tonne in 1Q2018 while CPO output was 1.9% QoQ lower in 2Q2018.

Source: AmInvest Research - 11 Jul 2018