Highlights 

Inventory level continued to decline. Palm oil inventory declined for the 2th straight month, by 5.1% mom to 1.82m tonnes in May 13, mainly lower imports and opening stocks, which more than offset higher output, lower exports and domestic consumption. 

Exports declined by 3% mom to 1.41m tonnes, as higher exports to India (+16.4%) and Pakistan (+178.1%) more than offset lower exports to China (-31.1%) and Netherlands (- 17.2%). Exports to China continued to decline for the 2nd consecutive month and we believe the decline was due mainly to its higher palm oil inventory. 

Total production rose marginally (by 1.3% mom) to 1.38m tonnes, as higher production from Peninsular Malaysia and Sarawak (+2.4% and +11.7% respectively) more than offset a 5.1% decline in Sabah’s production. 

The continued decline in inventory level (on the back of seasonally lower production cycle and Ramadhan season) is positive for near-term CPO prices. We believe CPO prices will likely peak by Jul 13 as peak production cycle (starting Oct) will likely bring inventory level back up. Maintain our average CPO price assumption of RM2,500/tonne (2013) and RM2,600/tonne (2014). 

Our Underweight stance on the sector maintained on: (1) Higher palm oil production in 2013; (2) Demand risk remains on the back of uncertainties in the EU and slower growth in China; (3) The wide CPO price discount against the soybean oil will unlikely benefit CPO consumption (and hence price) as we believe higher soybean crop from South America will narrow CPO’s price discount against the soybean oil; and (4) The sector’s expensive valuations.

Catalysts (downside) 

• Higher-than-expected soybean yield and soybean planting, resulting in lower soybean prices, hence prices of CPO;  India imposes import tax on CPO. 
• Longer-than-expected CPO price recovery path.

Risks 

• Earlier-than-expected recovery in the world’s major economies, resulting in higher edible oil demand and prices; 
• Weather uncertainties revisit, which would result in supply distortion, hence boosting prices of edible oil; and 
• Further action from the Malaysian Government to boost competitiveness of downstream plantation players.

Rating

UNDERWEIGHT (
) 

Negatives – (1) Weak global economic outlook; and (2) Impending excess supply of CPO. 

Positive – CPO is still relatively cheaper than soybean oil.

Top picks 

CBIP (BUY; TP: RM3.42)

Source: Hong Leong Investment Bank Research- 11 Jun 2013