• Palm Oil (PO) end-stocks ended 3.4% higher on MoM basis or at 2.4mn tonnes in October 2022no thanks to higher production (+2.4% MoM; 1.81mn tonnes),  despite the rebound in exports (+5.7% MoM to 1.5mn tonnes). This was further added by a higher carry stock from last month.

• Demand is expected to be muted in the final month of 2022 (i.e., NovemberDecember 2022), to be dampened among others by stiff competition from  Indonesia, challenging global economic outlook and elevated level of inflation.

• CPO price is expected to trade within a range of RM3,400/MT- RM4,400/MT  possibly up to 1Q23 to be supported by the widening discount of palm oil (PO) price against soybean oil (SBO) price, tightness in PO supply and strengthen in other edible oils prices due to weather issues, slow return of foreign worker and prolonged Russia-Ukraine geopolitical tension.

• Maintain a Neutral call on the sector with forecast 2023 CPO price average of  RM3,500 per tonne, a marked slowdown against 2022’s average of RM5,000  per tonne.

Closing Stocks Surged to 2.40m tonnes in October

Palm Oil end-stocks in Malaysia remained elevated in October 2022 after jumping by 3.7% MoM and 31.0% YoY (the highest since September 2019) to 2.40mn tonnes as higher export was unable to compensate for higher production which expanded by 2.4%  MoM to 1.81mn tonnes (5.1% YoY, 0.8% YTD). Export increased by 5.7% MoM and 5.9%  YoY to 1.50mn tonnes in October (0.4% YTD) which we believe could be due to importing countries replenishing their PO stock to take advantage of PO price competitiveness against SBO due to the widening discount parity between the two oils. Nonetheless, we are cautious on export demand moving forward as we believe demand could turn sluggish post festivities. This will be added with stiff competition from Indonesia and from other edible oils given our major importing countries are on a belt tightening drive due to inflationary environment, unfavourable exchange rates and elevated level of global commodity prices. As such, end of year stocks to could reach 2.4mn-2.8mn tonnes.

Beyond Oct 2022, the widening discount of price differential between PO price and SBO price is set to keep the CPO supported.

CPO price for the rest of 2022 until 1Q23 is expected to trade within a range of RM3,400/MT – RM4,400/MT among others due to:

• Widening discount between PO and SBO price which has made the PO price more competitive (as of writing: USD676/MT; 5-years average discount: USD153/MT).

• Possible tightness in PO supply from Malaysia and Indonesia due to lower yield, weather issue (possible flood in crop growing region in Kalimantan and Malaysia due to monsoon season that will disrupt harvesting and transporting of FFB) and slow return of foreign worker to Malaysia.

• Prolong geopolitical tension in Russia-Ukraine that will impact the Black Sea Grain export i.e., among others sunflower oils – may add to the tightness of edible oils supply.

• Strengthening in other substitutes oil price, an increase in biofuel mandate, weaker  Ringgit and a long waited full-reopening of China economy (zero COVID-19 policy) that may boost demand.

To recap, CPO prices in the derivatives market for the month of October traded mostly sideways,  tracking the price movement of soybean oil market amid concerns over slower demand and higher stocks and PO supply from Malaysia and Indonesia given that the sector is currently in the seasonally higher palm oil productive month. PO price was well supported with the average CPO  price at Bursa Derivatives Market (BMD) closed relatively higher at RM3,861/MT (+4.6% MoM)  whilst the CPO price for local delivery settling lower to an average of RM3,682/MT in October against RM3,736.50/MT recorded in the previous month. As for Jan-Oct 2022 period, the MPOB  average CPO price of RM5,346/MT was higher by RM1,086/MT or a jump by 26% YoY.

Maintain Neutral on the sector in 2023 with a lower CPO price forecast of RM3,500/MT (average)  against 2022’s average CPO price forecast of RM5,000/MT (average). We have a BUY call on IOI  (TP: RM4.75), KLK (TP: RM28.77), SIME Darby Plants (TP: RM5.03), GENP (TP: RM7.45) and Sarawak Plant (TP: RM2.85), with a HOLD recommendation for FGV (TP: RM1.50), HAPL (TP:  RM2.40), SOP (TP: RM2.95), TSH (TP: RM1.19) and Boustead Plant (TP: RM0.69); and a non-rated for TH Plant.

There could be downside risks for CPO price and this may come from 1) a slower-than-expected economic growth and consumption of edible oils, 2) a lower-than-projected demand due to changes in government policies of importing and/or exporting countries, 3) a higher-than-expected supply and stockpiles of Soybean and SBO, 4) a narrowing price differential between  CPO and SBO, 5) a weakening of crude oil prices, and 6) unprecedented events i.e., prolonged  COVID-19 pandemic with a new variant and therefore, another round of movement restriction worldwide, prolonged Zero COVID-19policy in China and Russia-Ukraine war conflict.

Source: BIMB Securities Research - 10 Nov 2022