• Malaysia’s February 2024 Palm Oil (PO) end-stocks contracted by - 5% MoM to 1.92mn tonnes, mainly attributed to a drop in CPO production by -10.2%, despite lower exports volume (-24.7% MoM to 1.02mn tonnes).

• We anticipate that CPO prices will remain stable within the range of circa RM400/MT above or below RM3,800/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 muted demand.

Production and closing stocks continued to ease. Malaysia's February palm oil inventory decreased further to 1.92mn tonnes (-5% MoM, -9.5% YoY), reflecting declines in both crude palm oil (CPO) stocks (-2.8% MoM, -11.6% YoY) and processed palm oil (PO) stocks (-7.4% MoM, -6.9% YoY). This reduction is primarily attributed to lower production totalling 1.26 mn tonnes (-10.2% MoM, +0.5% YoY) due to the ongoing seasonally low production cycle. Nonetheless, a slight increase in production of +0.5% YoY is believed to be a result of a recovery in the labour force (harvesters) and improved fresh fruit bunch (FFB) yield by +0.9% MoM (YTD: 3.1%). Reduced in production and stock level has led the CPO price to surge in February to RM3,950 per metric ton (+4.4% MoM, 1.1% YoY).

Lower export. Malaysia's exports have continued to decline for four consecutive months, dropping to 1.02mn tonnes (-24.7% MoM, -10% YoY) in February. This decrease is likely as a result of temporary halts in stock replenishment from major importing countries, especially China and India, as well as a shift towards comparatively cheaper substitute edible oils such as soybean oil and sunflower oil. However, we anticipate exports to pick up, particularly with the upcoming Aidil Fitri festivities.

Outlook. The general consensus among speakers at the recently held 35th Palm & Lauric Oils Price Outlook Conference & Exhibition (POC2024), is that palm oil prices will be higher in the near term before moderating in 2H24. We are inspired by this, as it corresponds nicely with our view. However, as to projections on the price trading range and average palm oil price for 2024, speakers' views diverge with some noncommittal while others are either measured or bullish.

We advocate a reserved or measured projection where we foresee downward pressure exerting on CPO prices from 2H24, in part on higher supplies. The end of the dry season will witness palm oil production in the country to increase from mid 2Q24 onwards. We believe CPO production will 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).

Indonesian palm oil production is also expected to increase in 2024. This is based on i) minimal impact seen on production due to the El Nino phenomenon, and ii) new acreage coming into harvest which could see a 2.2% increase in palm oil production to circa 54.4mn tonnes in 2024, although mandatory biofuel blending policy and possibility of it being increased to B40 from B35 in 2H24.

On the demand side, muted demand still persists in major markets such as India and China which is partly due to high stockpiles. Another major palm oil importing country, Pakistan, is plagued with high inflation and high interest rates. It faced challenges in importing palm oil products due the high price which is limiting demand. The narrowing in the price discount gap between palm oil and other edible oils especially soybean oil favors the latter.

Competition from other edible oils is always an ongoing concern. According to the latest WASDE report, global soybean production is forecast to expand by 11.9% to 114.3mn tonnes in 2023/2024F from 102.2mn tonnes in 2022/2023, underpinned by higher production from Argentina. On the back of the increase in soybean and soybean oil global production, we believe their prices would remain low, thus limiting upward mobility of palm oil price.

Global geopolitical tensions, especially developments in the Black Sea and the Red Sea are particularly worrisome. These can cause not only disruptions in the supply chains but also delays and higher transportation costs. The stakes are higher with the recent reported deaths of 3 seafarers in the Red Sea due to the Houthi’s attacks on maritime shipping.

WTO rules EU’s restrictions on palm oil biofuels discriminatory. The WTO panel ruled on 5th March 2024, in Malaysia’s favor that the EU’s renewable energy policy, which restricted palm oil biofuels, as discriminatory. An industry expert reportedly commented that with this ruling, “Malaysia can now market biofuels to the EU in wider capacity without being subjected to any form of discrimination with the prospect for sustainable aviation fuel (SAF) and marine biofuel requirement is growing.” This could potentially open up more opportunities for Malaysian palm oil in the EU market. However, the panel allowed the EU to keep its rules on Indirect Land Use Change (ILUC) which may require further effort from Malaysia in order to manoeuvre safely in ensuring palm based biofuel is fully accepted.

Maintain CPO price range near RM3,800/MT, to trade within a range of RM400/MT above or below for the rest of the year. In the midst of industry-wide challenges, including escalating operational costs and consistently low yields, plantation companies are finding reassurance in the optimistic sentiment surrounding the current CPO price outlook, which is anticipated to offer sustained support for CPO prices. Assuming no other unexpected events, we expect the CPO price to remain within a range of RM400/MT above or below RM3,800/MT for the rest of the year. This expectation is supported by: i) anticipated tightness in palm oil (PO) supply, coupled with the strength in other edible oil prices such as soybean oil (SBO), ii) prolonged geopolitical tensions, including the Black Sea and Red Sea tension, and iii) potential increases in production costs that might surpass initial projections.

However, there are several downside risks to our CPO price outlook and as such we anticipate a moderation in CPO price, which is likely to be influenced by several factors:

i) Narrowing/negative discount gap of PO price and soybean oil price - potentially limiting PO price competitiveness and hence, leading to slowing demand from major importing countries (as time writing: USD153.27/MT; 5-years average discount: USD235.98/MT);

ii) Muted Demand Amid Global Uncertainties: Additionally, there is the risk of muted demand due to global economic uncertainties, inflationary pressures, heightened price sensitivity in importing countries as well as potential geopolitical tensions risk surrounding territorial disputes from China; and

iii) Strengthening of ringgit against US Dollar: this may impact export competitiveness and hence, further weigh on the demand for palm oil product.

Maintain a NEUTRAL call on the plantation sector with a 2024 CPO average selling price of RM3,600/MT, considering the anticipated risk of challenging earnings due to lower-thanexpected palm product prices, muted demand, and ongoing lower-than-expected production, which are expected to persist and pose challenges for plantation companies' prospects. We have a BUY call on IOI (TP: RM4.50) and SELL call on FGV (TP: RM1.23).
 

Source: BIMB Securities Research - 12 Mar 2024