Inventory in Aug 2020 increased slightly to 1.699m tonnes vs. 1.698m tonnes in July, but well below the level recorded in the same period of last year of 2.240m tonnes (+0.1% mom; -24.2% yoy). A tad increase in inventory in August reflects the 7.1% increase in CPO stocks during the month, mainly attributed to higher production and lower demand probably due to adjustment by importers especially from India after their restocking activities in April-July 2020. Nonetheless, PPO (processed palm oil) dropped 7.3% mom to 949.9k tonnes. We maintain our conviction that stock level would remain elevated this year to settle above 2.0m tonnes during Oct-Nov period as production enters its productive months and demand starts to slow down as replenishment activities are completed, and hence normalises.
Palm oil export volume decreased 11.3% mom to 1.582m tonnes in August 2020 as major importing countries like India, Pakistan, EU, USA, Vietnam and Pakistan slowing their PO intake.
Malaysia’s CPO production increased 3.1% mom (+2.3% yoy) to 1.863m tonnes in August 2020 vs. 1.807m tonnes in July 2020; the highest month in August since August 2015. The bulk of the increase in production was from Sarawak and Sabah, which contributed 823.7k tonnes of the 1.30m tonnes increase (total production: 1.863m tonnes). As for Peninsular Malaysia, the increase in production was led by Negeri Sembilan, which increased 11% to 66.4k tonnes, followed by Kelantan (8.4% to 34.9k tonnes), Pahang (4.5% to 317.9k tonnes) and Terengganu (1.4% to 57.8k tonnes). Nonetheless, as for Jan-August 2020 period, CPO production dropped 4.7% yoy to 12.72m tonnes, i.e. making up 67% of our 2020 forecast. We forecast CPO production for this year to fall 5% yoy to 18.87m tonnes on account of reduced yields due to dry weather, biological tree stress and low fertilisers usage.
Palm Oil (PO) prices in August was bullish, believed to be driven by improvement in market sentiment and demand prospect, compounded by a rally in SBO prices in Chicago Board of Trade (CBOT). The rally in SBO price is believed to be due to the strong soybean demand from China and worries about deterioration in US crop conditions due to hurricane and tree stress, as well as weakening dollar. The BMD’s 3-month CPO futures price for the month of Aug improved further to trade higher and closed the month at RM2,738/MT (+2.3% mom). On the other hand, average CPO price for local delivery increased 11.8% mom to end the month at RM2,815/MT. As for Jan-Aug 2020 period, the MPOB average CPO price of RM2,529/MT was higher by RM539/MT or 27.1% against RM1,990/MT recorded in the same period last year.
At the time of writing, MPOB’s CPO price for local delivery was traded at RM2,907.50/MT. We are of the view that the higher price momentum could be capped and the near-term price could be under pressure – given export is expected to deteriorate as replenishment activities completed and demand normalise, aided by concerns over the slower pace of the world’s recovery from Covid-19. Moreover, despite the recent rally in SBO price, the spread between SBO and PO has narrowed to USD55/MT-USD60/MT against its 5-yrs avg. of circa USD100/MT (believe could be due to rise in PO price and strengthening of Ringgit against USD) – which could make PO less competitive against its rivals. We predict that price may decline to RM2,400/MT – RM2,600/MT from October to November as palm oil harvest enters its peak production month (probably in October or early November) and coincides with soybean harvesting season in US.
Risk factors for our price estimate include 1) slower economic growth and consumptions of edible oils, 2) lower-than-expected demand, 3) ample supply and stockpiles of Soybean and SBO, 4) narrowing of the price differential between CPO and SBO, 5) weakening of crude oil prices, and 6) prolong Covid-19 pandemic and movement restriction.
Maintain Neutral on the sector. Although CPO prices have been bullish lately, we are of the view that high operational costs and suppressed profit margin on lower-than-expected production and sales volume would continue to be key risks to planters’ earnings. We expect performance of pure plantation companies to be favourable given current palm products prices currently trading above 2019’s average price. Nonetheless, there might be profit margin squeeze for downstream players due to higher feedstock price and keen competition especially from petrochemical products that will impact demand, hence affecting sales volumes of bio-based products. We maintain our earnings forecast with BUY call on TSH (RM1.23), SOP (RM4.30) and Sarawak Plant (RM1.94) whilst retaining HOLD recommendation on KLK (RM23.10), IOI (RM4.80), GENP (TP: RM10.00), FGV (TP: RM1.04), SDPL (TP: RM4.83) and HAPL (TP: RM1.66); whilst non-rated for TH Plant.
Source: BIMB Securities Research - 11 Sept 2020
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Created by kltrader | Aug 09, 2024