Highlights

Inventory in Nov 13 grew for the 3rd consecutive month (by 7.1% mom) to 1.98m tonnes mainly on lower exports and domestic consumption, which altogether more than offset a 5.6% decline in output.

Exports declined by 8.7% mom to 1.52m tonnes, mainly on lower exports to China (-10.3%), Pakistan (-67.4%) and the US (-7.6%). We believe exports demand for palm oil will likely remain on a downtrend in the coming months, as winter season will historically slow demand for palm oil (in particularly, from the Northern Hemisphere and China). According to Intertek, shipments of palm oil for the first 10 days of Dec fell 20% mom to 378k tonnes.

Total output declined by 5.6% to 1.86m tonnes, as most states started experiencing lower output (with the exception of Sabah, which still registered a positive mom output growth of 3.1%).

2013 a foregone conclusion… and moving to 2014… While we are turning slightly more positive on the sector’s outlook in 2014 (underpinned by more synchronized global economic growth outlook and biodiesel policy in Indonesia and Malaysia), we are cognizant that higher palm usage from biodiesel policy may not necessarily boost CPO prices significantly higher from current level, as palm oil price needs to stay sufficiently low vis-à-vis crude oil price (assuming current price level to stay) in order to sustain the economic viability of biodiesel.

For now, we are keeping to our 2014 average price projection of RM2,600/tonne (pending review with upward bias).

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 - 11 Dec 2013