• Malaysia’s January 2024 Palm Oil (PO) end-stocks contracted by - 11.8% MoM to 2.02mn tonnes, mainly attributed to a drop in CPO production (-9.6% MoM), export volume (-0.8% MoM) and imports volume (-26.4% MoM).
   
• We anticipate that CPO prices will remain stable within the range of circa RM400/MT above or below RM3,700/MT in the near term, despite facing challenges, including stiffer competition from other edible oils.

• Maintain a NEUTRAL call on the sector with a base-case 2024 average CPO price forecast of RM3,600/MT, given the risk of challenging earnings on the back of lower palm product prices and higher operating costs.

Production and closing stocks eased further. Malaysia's January palm oil end-stocks eased further to 2.02mn tonnes (-11.8% MoM), mainly due to lower production of 1.40mn tonnes (-9.6% MoM), despite a slight decline in export figures to 1.35 mn tonnes (-0.8% MoM). The industry is currently experiencing a low productive phase, with the monthly decline in CPO production can be traced to weakening in FFB yield and oil extraction rate (OER) nationwide. Subdued export performance is likely a result of slower demand from major importing countries on normalization of restocking activities, and increased competition from Indonesia and other edible oils such as soybean oil, rapeseed, and sunflower oil. Overall, the lower inventory was attributed to a decrease in both CPO stocks (-11.8% MoM, -16% YoY to 1.06 mn tonnes) and Processed PO stocks (-11.8% MoM, - 4.7% YoY) to 0.96 mn tonnes) during this period. Hence, this supported CPO price in January to RM3,784/ MT (+3.5% MoM).

Outlook. CPO prices in the near term are anticipated to firm up moderately with the 3-months futures price on the uptrend. It was reported that benchmark Malaysian palm oil futures have risen c.5% YTD after losing 11% YoY in 2023. We believe this is driven by a low palm oil production in both Malaysia and Indonesia. Additionally, the sustainability of this price uptrend may be bolstered by factors such as: i) stock depletion, ii) festive season driven demand, and iii) continued strong industrial demand for food e.g., the use of palm oil as a cheaper substitute for clarified butter in the making of vanaspati ghee.

As for the 2024 mid and long term outlook, we see downward pressure exerting on CPO prices. The end of the dry season will witness palm oil production in the country to increasing from mid 2Q24 onwards, giving rise to greater supply. Production in the country could get a boost from the government’s commitment in easing availability of labour, normalizing manuring activities and new areas coming into production. We believe CPO production to improve in 2024, reaching around 18.86mn tonnes (+1.7% YoY). Moreover, we are maintaining our forecast for ending stocks to be close to approximately 2.16mn tonnes and export demand is projected to remain supported at 16.27mn tonnes (Table2).

In addition to competition from Indonesia’s palm oil production, stiffer competition from soybean oil and sunflower oil are also anticipated. According to the United States Department of Agriculture (USDA) in its World Agricultural Supply and Demand Estimates (WASDE) February report, Brazil’s soybean production in 2023/2024 is estimated at 156 mn/MT, resulting in global ending stocks reaching record highs of 116 mn/MT. This surplus availability of these edible oils is likely to narrow the discount spread against CPO prices, thereby favouring the former.

Another area of concern is the muted global demand for palm oil products especially from major importing countries like India and China. In India, it has been reported that better discounts from “cheaper” edible oils was the main reason for the lacklustre in palm oil demand. However, we believe this situation is only temporary and untenable due to the unpredictability of global weather conditions and geopolitical tensions which could easily drive-up supply costs and upended benefits currently derived. As for China, the sluggish demand for palm oil, attributed to the economic slowdown, is being addressed by the Chinese government through various economic stimulus measures. These efforts appear to be effective, as China's economic recovery is gradually gaining momentum. Additionally, major global markets such as the US and Euro are on the verge of ending their monetary tightening policy and cutting interest rates. This could in turn, spur global economic growth during the year, including demand for palm oil products.

On the domestic front, the cost-of-living pressures are expected to increase with staggered Subsidy Rationalization Initiatives (SRI) is expected to be implemented from 2H24 onwards. Despite measures taken by the government to help alleviate the impact on the masses, we believe many consumers would face difficulties in adjusting to the higher anticipated cost of living. This could cause domestic household demand for palm oil products to retreat, albeit slightly.

CPO price to remain stable. Taking into account the various factors mentioned above, we are of the view that (MPOB-local delivery) CPO prices to remain stable within a range of approximately RM3,700/MT to RM4,100/MT in the near term. However, there exists a possibility of a surprise positive development where price may surpass RM4,100/MT in the event of an unprecedented occurrence of weather effect, and the increase in utilisation of palm oil in biodiesel mandate.

Sector NEUTRAL recommendation. We maintain a NEUTRAL stance on the plantation sector, projecting an average base-case CPO price of RM3,600/MT for 2024. This is driven by concerns over potential downside risks in CPO prices and escalating operating costs, which may impact the earnings performance of plantation companies, especially in the upstream segment. Nevertheless, we recommend long-term investors to consider accumulating shares of companies with higher growth potential in FFB production and/or downstream involvement, as well as those demonstrating solid fundamentals and efficient estate management practices.

Our BUY call for plantation stock are IOI (TP: RM4.50) and KLK (TP: RM24.05). Maintain a HOLD call for SIME Darby Plants (TP: RM4.80), GENP (TP: RM6.00), Sarawak Plant (TP: RM2.16), SOP (TP: RM2.50), and TSH (TP: RM1.01); whilst a SELL on FGV (TP: RM1.23), Boustead Plants (TP: RM1.55) and HAPL (TP: RM1.70), though a non-rated for TH Plant.

Source: BIMB Securities Research - 14 Feb 2024