Highlights

Inventory in Sep 13 grew for the 3rd consecutive month, by 7% mom to 1.78m tonnes, mainly on the back of higher output and weaker domestic consumption.

Exports grew 5.2% mom to 1.61m tonnes, mainly on higher exports to India (+90.9%), Pakistan (+29.3%) and the US (+14.6%), which more than mitigated lower exports to China (- 20.5%). We note that the strong export figure in Sep 13 was driven largely by restocking ahead of Diwali (in Nov).

Total production growth strengthened to 10.2% mom from 3.6% last month, due to the absence of festive holidays (Aug was a shorter working month on the back of Raya holidays).

We are still keeping our average CPO price projections unchanged at RM2,500/tonne and RM2,600/tonne in 2013 and 2014 respectively, pending further review with downward bias.

We see limited upside to current CPO price for the remaining months of 2013 on the back of seasonally higher production, the absence of festive season that will drive nearterm demand from the major palm oil consuming countries, and demand setback from India arising from the recent Rupee depreciation.

Moving to 2014… While biodiesel policy in Indonesia and Malaysia will set a floor to CPO price, we still do not see a strong CPO price recovery next year, as: (1) Palm oil price needs to stay sufficiently low in order to sustain the economic viability of biodiesel (see Figure 10); (2) Higher palm oil output from Indonesia (on the back of heavy new planting in 2008- 2011); and (3) Current high soy/corn ratio suggests that South America may register another round of record high soybean planting in 2013/14.

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  For exposure in the sector, our top picks are and CBIP (BUY; TP: RM3.39) and Genting Plantations (HOLD; TP: RM10.31).

Source: Hong Leong Investment Bank Research - 11 Oct 2013