• June 2022 end-stocks surged to a 7-month high of 1.66m tonnes on lower export (-13% m-o-m to 1.19m tonnes) and higher CPO production (+6% m-o-m to 1.55m tonnes).

• Widening PO price discount against SBO price, weaker Ringgit and slower growth in Malaysia PO production is set to keep the CPO price supported.

• Maintain ‘Overweight’ call on the sector with 2022 and 2023 average CPO price forecast of RM5,000/MT and RM3,500/MT respectively.

Closing Stocks surged to 1.66m tonnes in June

As expected, as Malaysia is entering its higher productive month (registering a higher m-o-m improvement in FFB and CPO production) and seasonally slower export demand post festivities has pushed palm oil (PO) end-stocks in Malaysia to increase by 8.76% MoM to 1.655m tonnes in June. Higher competition against Indonesia resulted in Malaysia’s PO to lose its market share given the influx of PO supply in the market post export ban by the Indonesian Government. This was also aided by higher stocks and slower export momentum in Malaysia - a condition that could continue in the next couple of months until surplus stocks reduce and normalise to 6m-7m tonnes (current surplus is expected to be about 2m-3m tonnes). Almost all of Malaysia’s major importing countries like India, EU, Kenya, Philippines and Turkey (Table 2) decreased their PO intake, no thanksto the lifting of Indonesia’s export ban which has prompted traders to turn to Indonesia again. Overall, the higher PO end-stocks were due to higher stocks for both the CPO and PPO (processed palm oil), which increased by 6.2% and 11.8% respectively to 881.3k tonnes and 773.8k tonnes. Stockpiles remained higher compared to a year ago - increasing by 2.53% YoY to 1.66m tonnes (June 21: 1.61m tonnes).

Stock level may hover in the region of 1.65m tonnes to 1.75m tonnes in the next few months, to be driven by 1) higher production momentum (note: as the sector is entering into a seasonally higher PO productive month), 2) slower demand postfestivities, and 3) the lifting of Indonesia PO export ban policies.

Nonetheless, the tight supply situation of sunflower oil (if the geopolitical tension between Russia and Ukraine prolongs), possible another hiccup in soybean oil supply from America (subject to weather) as well as canola oil and rapeseed oil supply, slower growth in Malaysia PO production and increase in biodiesel mandate (Indonesia is expected to increase its biodiesel mandate of B30 currently to B35 biofuel content in July22) are four catalysts that could be supportive of PO demand in the short-to-medium term – hence, a near-term CPO price support.

Production is entering its productive month. In the month of June 2022, CPO production surged to a 7-month high, increased by 5.76% on MoM basis (-3.80% YoY) to 1.545m tonnes as most states in Peninsular, Sarawak and Sabah recorded an increase in production on the back of 5.8% improvement in FFB yield (Peninsular: +6.2% m-o-m; Sabah: +2.7% m-o-m and Sarawak: 7.1% mo-m). For January-June 2022 period, CPO production dropped by 1.12% YoY to 8.270m tonnes, making up 43%-45% of our 2022 forecast of 18.5m-19.15m tonnes. On top of slower YoY improvement in FFB yield (Peninsular: -2.13%; Sabah: -20.28% and Sarawak: +2.56%; Malaysia: - 5.93%), the growing risk of PO supply disruption due to hiccup in labour shortage issue, may hinder planters in Malaysia to optimise their production and hence, below potential of PO supply. We expect production for this year could reach to 19.15m tonnes against 18.12m tonnes recorded in 2021.

Maintain CPO Price Forecast of RM5,000/MT for 2022 and RM3,500/MT for 2023.

CPO prices in the derivatives market traded in a volatile mode, tracking the price movement in the soybean oil market amid concerns over the lifting of Indonesia’s ban on the export of PO. As such, the average CPO price at Bursa Derivatives Market (BMD) closed relatively lower at RM5,568.18/MT (-12.1% MoM) with the CPO price for local delivery settled to an average of RM6,106/MT against RM6,873/MT recorded in the previous month. As for January-June 2022 period, the MPOB average CPO price of RM6,302/MT was higher by RM2,250/MT or 55.5% against RM4,051/MT recorded in the same period last year. We are of the view that CPO price in the near-to-medium term will remain supported given 1) the widening discount of price differential between PO and SBO as the current discount parity is at c. USD400/MT against 5- years average discount of c. USD128/MT - would make PO gain its price competitiveness against price-sensitive major importing countries, 2) increase in biofuel mandate – Indonesia has moved from B30 to B35, 3) weaker Ringgit, 4) full-reopening of China economy (zero COVID-19 policy) will boost demand, and 5) slower growth in PO supply from Malaysia.

Maintain an Overweight call on the sector with an average CPO price forecast for 2022/23 of RM5,000/MT and RM3,500/MT. We remain positive on plantation companies’ earnings in the upcoming result seasons given earnings will remain supported by higher CPO price realised in the 2Q22 of RM6,552/MT against RM4,208/MT in 2Q21. Nevertheless, we are cautious given high operational costs and suppressed profit margin on lower-than-expected production due to weaker yield and labour shortage issues as well as higher fertiliser costs which may dampen planters’ earnings. We have a BUY call on IOI (TP: RM4.75), KLK (TP: RM28.77), SIME Darby Plants (TP: RM5.70), GENP (TP: RM9.57) and Sarawak Plant (TP: RM2.85), with a HOLD recommendation for FGV (TP: RM1.82), HAPL (TP: RM2.90), SOP (TP: RM6.16), and TSH (TP: RM1.55); and non-rated for TH Plant.

Downside risks for CPO price may include 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 price differential between CPO and SBO, 5) weakening of crude oil prices, and 6) unprecedented events i.e., prolonged COVID-19 pandemic with a new variant and another round of movement restriction worldwide, prolonged Zero COVID-19 policy in China and RussiaUkraine war conflict

Source: BIMB Securities Research - 13 Jul 2022