• Inventory surged 1.5% mom to 1.57m tonnes in May.

• CPO production increased 2.8% mom to 1.57m tonnes.

• Palm oil exports contracted 6.0% mom to 1.27m tonnes.

• Maintain Overweight on the sector with average CPO price of RM2,950/MT for 2021 and RM2,700/MT for 2022.

Closing stocks increased 1.5% mom to 1.57m tonnes in May

Palm oil inventory surged 1.49% mom to 1.75m tonnes in May 2021 against 1.55m tonnes recorded in Apr 2021 on lower export demand and increase in production during the period. The higher PO stock was driven by the higher CPO stock that rose significantly to 841.5k tonnes (+8.4%) – led by higher stock in Sabah that increased by 16.8% mom to 235.9k tonnes, followed by Peninsular (4.2% to 427.8k tonnes) and Sarawak (2.9% to 177.8k tonnes). On the other hand, PPO stocks (processed PO) declined 4.4% mom to 727.5k tonnes. Still, the stockpiles remain relatively low at end May21, improving by 22.7% to 1.569m tonnes against 2.03m tonnes recorded in May 2020.

We expect stocks level in the next couple of months would continue to remain elevated in the region of 1.55m tonnes to 1.65m tonnes, in view of 1) production is expected to recover gradually on the back of favourable weather conditions and production cycle is moving into seasonally higher PO productive month, 2) demand will be slower post festivities as replenishment activities complete and normalise, compounded by an increase in competition from Indonesia, as well as from other edible oils especially soybean oil, rapeseed oil and sunflower oil, and 3) resurgence of Covid-19 which would slow PO intake especially from India.

Production surged 2.8% mom to 1.57m tonnes.

CPO production increased 2.84% mom (-4.83% yoy) to 1.572m tonnes in May 2021 from 1.528m tonnes registered in previous month mainly driven by higher production from Sabah and Sarawak on higher oil extraction rate achieved compared to Peninsular. Year to-date production decreased 5.69% yoy to 6.758m tonnes as we believe lower FFB yield would continue to shadow the CPO production as productivity is wedged by the lag impact of weaker yield from the dry weather experienced in 2019 coupled with hiccup in productivity due to labour shortage issues.

Maintain 2021/22 average CPO price forecast at RM2,950/MT-RM2,700/MT

The BMD’s 3-month CPO futures prices for the month of May was volatile, traded range bound as concerns on lower PO demand intensified with the resurgence of COVID-19 cases worldwide, compounded by the weakness in soybean oil price performance in CBOT as well as Palm Olein performance in Dalian Commodity Exchange. Nonetheless, CPO price closed higher at RM3,919/MT (+1.32% mom), tracking the positive trend in the soybean oil market on strong market sentiment driven by the tight supplies of vegetable oil worldwide. Soybean oil price, the closest substitute to palm oil is trading at the highest level, as dry and hot weather conditions are forecast to prevail in Northern America and parts of Canadian Prairies. Conversely, the average CPO price for local delivery increased 8.3% mom (+120.4% yoy) to an average of RM4,572/MT against RM4,220/MT recorded in the previous month. As for Jan May 2021 period, the MPOB average CPO price of RM4,096/MT was higher by RM1,599/MT or 64.0% against RM2,497/MT recorded in the same period last year.

We are of the view that higher near-term CPO price is possible. Although any price increase could be capped by the narrowing of the price differential between CPO and SBO, we believe this is inconsequential. The anticipation of tight supply of global vegetable oils, as well as improved demand especially from China and India means CPO price could retain its upward trajectory, possibly up until July 2021. This is in tandem with our view of tight palm oil supply scenario in Malaysia, given unresolved labour shortage issues and recent Malaysian government’s decision to impose a stricter implementation of Movement of Order Control (MCO) on agribusiness. In light of these developments, we foresee that price for June/July 2021 would trade within a range of RM4,100/MT and RM3,800/MT as opposed to RM2,366/MT and RM2,795/MT during the same period last year.

We believe the possible negative factors for CPO price are 1) slower-than-expected economic growth and consumption of edible oils, 2) lower-than-expected demand due to changes in government policies of importing countries, 3) higher-than-expected 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) resurgence of Covid-19 pandemic with another round of movement restriction.

Maintain “Overweight”

Maintain Overweight call on plantation sector. Our base case scenario is for CPO prices to continue their upward trajectory in the short-term – due to tighter supplies and improved demand and then moderate in the later part of 3Q21. In view of this, we expect plantation companies’ earnings to remain firmly as CPO price is anticipated to trade above RM3,800/MT, particularly for 2Q21. We have BUY call on HAPL (RM2.17), SOP (RM4.50), IOI (RM4.80), KLK (RM24.40) and SIME Darby Plants (TP: RM5.00), whilst HOLD recommendation on Sarawak Plant (RM2.64), TSH (TP: RM1.23), GENP (TP: RM9.00) and FGV (TP: RM1.30); and non-rated for TH Plant.

Source: BIMB Securities Research - 10 Jun 2021