Highlights

Inventory in Oct 13 grew 3.5% mom to 1.85m tonnes (highest since May 13) mainly on the back of higher imports and output, which altogether more than offset higher exports and domestic consumption.

Exports grew 3.3% mom to 1.66m tonnes, mainly on higher exports to China (+31%), Pakistan (+48.4%) and USA (+41%), which more than offset slower exports to India (- 25.2%) and Netherlands (-2%). While palm oil inventory in China has declined to the lowest level since Jan 13, we believe exports to China will likely slow down in the coming months, as winter season will historically reduce demand for palm oil.

Total output growth slowed to 3.1% mom (from 10.2% in the previous month), with Sabah being the largest growth contributor (which grew by 6.45% mom).

YTD, CPO price averaged at RM2,340/mt, and we are keeping our average CPO price projections unchanged at RM2,500/tonne and RM2,600/tonne in 2013 and 2014 respectively for now.

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 vis-à-vis crude oil price in order to sustain the economic viability of biodiesel (see Figure 9); (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).

Source: Hong Leong Investment Bank Research- 12 Nov 2013