• Malaysia’s palm oil (PO) end-stocks for May surged by 0.5% MoM to 1.75mn tonnes, primarily driven by a 13.5% rise in CPO production, despite increase in exports by 11.7%. Conversely, the average CPO price dropped by 8.3% MoM to RM3,903 in May.

• We anticipate continued moderation in CPO prices due to increased production, improved US crop conditions, and muted demand. Maintain our trading range estimates at approximately RM400/MT above or below RM3,800/MT for the near term.

• 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 due to lower palm product prices and muted demand.

Inventory Increased Despite Growing Export Momentum. Malaysia's May PO end-stocks jumped to 1.75mn tonnes (+0.5% MoM, +3.7% YoY). This increase was driven by heightened CPO production to 1.70mn tonnes (+13.5% MoM; +12.3% YoY), despite exports growing to 1.38mn tonnes (+11.7% MoM, +27.7% YoY) and imports fell sharply to 20,761 tonnes (- 40.3% MoM, -74.4% YoY). The higher exports in May were likely due to recent price corrections, leading to increased purchases from India, which saw their total palm oil imports in May rise by 12.4% MoM.

Continue Pick Up in Production. The improved in CPO production was due to seasonal trends, higher harvesting activities supported by adequate labor, and improved FFB yield to 1.43 tonnes (+12.6% MoM, +16.3% YoY). Most states reported increased production this month, with the highest contributions from Peninsular Malaysia (+16.8% MoM, +25.1% YoY to 999,159 tonnes), followed by Sarawak (+16.2% MoM, +2.5% YoY to 348,878 tonnes). Sabah saw a minimal growth of 2.9% MoM but experience a YoY decline of -5.78% to 356,418 tonnes, likely due to unfavourable weather. Overall, the average May CPO price dropped by 8.3% MoM to RM3,903 mainly due to higher output, though slightly mitigated by stable demand.

Outlook. Moving forward, we expect the production trend to gradually increase, with peak output likely at the end of Q2 or in Q3. This is supported by anticipated normalizing weather conditions (with El Niño risks subsiding and a mild La Niña), proper maintenance and manuring of oil palm estates, as well as improved productivity. However, demand could be hampered as CPO price is still trading at a narrower discount to soybean oil (as of the time of writing USD134.50/MT; 5-year average discount: USD234.83/MT), making it less attractive to importers. In tandem, stockpiles are expected to rise, and we are maintaining our forecast for end-stocks to be close to 2.16mn tonnes, with CPO production reaching around 18.86mn tonnes. In the absence of any major catalysts, we anticipate continued moderation in CPO prices due to increased production, improved US soybean crop conditions, and the fragile global edible oil supply-demand scenario. We maintain our trading range estimates of approximately RM400/MT above or below RM3,800/MT for the near term

Despite expectations of higher global soybean output for 2024, several risks could potentially support CPO prices include: (i) lower Brazil soybean production due to flooding, (ii) a proposed 20% export tax by the Brazilian government on corn and soybean products, which could slow production and exports, (iii) tighter soybean oil supply in Argentina due to delayed soybean harvests and higher operational costs caused by a lack of natural gas, and (iv) adverse weather conditions affecting edible oil production in the Black Sea region.

We are maintaining our base case 2024 CPO average selling price assumptions of RM3,600/MT. This decision is based on several factors, including higher palm production, muted demand, persist inflationary pressures, and the anticipation that the discount gap between CPO and soybean oil will continue to narrow. We maintain a NEUTRAL call on the plantation sector due to the absence of notable catalysts. We have a BUY call on IOI (TP: RM4.50) and a SELL call on FGV (TP: RM1.23).

Source: BIMB Securities Research - 11 Jun 2024