Highlights

Inventory  increased  by  1.8%  m om  to  2.09m  tonnes   (higher than  consensus  median  estimate  of  2.05m  tonnes), as higher exports  and  lower  output  were  slightly  more  than  offset  by imports.

Exports  rose  by  13.3%  mom  to  1.63m tonnes, driven mainly by  higher  exports  to  China  (+5.1%)  and  India  (+22.5%).  We believe  the  increase  is  the  results  of  the  Government’s  move to  exempt  CPO  from  export  duties  and  increased  buying ahead  of Diwali celebrations.

Total  output  declined  6.6%  mom  to  1.9m  tonnes,  due  to higher  base  in  the  previous  month  (as  plantation  workers returned  from  festive  holidays)  as  well  as  the  less  favourable weather  conditions.

Stockpile  in  Oct  likely  increase  further.  Although production  will  likely  be  flattish  in  Oct  (looking  at  the production in Sep), we believe stockpile will st ill likely increase further,  as  exports  to  India  could  weaken  in  the  absence  of seasonal  replenishing  activities.  Not  helping  either,  is  the falling  Brent  crude  pri ces  (which  has  declined  to  below US$90/barrel,  the  lowest  since  2010),  which  will  continue  t o diminish  interest  on  biodiesel  (which  is  the  main  catalyst  to CPO  demand).  According  to  cargo  surveyor  Intertek  Testing Services,  palm  oil  exports fell 18.9% mom fir the first 10 days of Oct, on weaken demand  from  the EU and China.

Maintain  our  average  CPO  price  projection  of  RM2,400/tonne and RM2,300/tonne  for 2014  and 2015 respectively.

Catalysts   

• Earlier-than-expected  recovery  in  the  world’s  major economies, resulting in higher  edible oil demand  and prices;
• Timely  implementation  of  higher  biodies el  mandate  in Indonesia  and Malaysia.
• Weather  uncertainties  revisit,  which  would  result  in  supply distortion, hence boosting prices of edible oil.

Risks 

• Higher-than-expected  soybean  yield  and  soybean  planting, resulting in lower  soybean prices, hence  prices of CPO.
• India  imposes higher  import duty on CPO.

Rating  UNDERWEIGHT

• Negatives  –  (1)  Weak  demand  and  price  outlook;  and  (2) Pricey valuations.
• Positives  –  (1)  Long  term  sector  outlook  remains  favourable; (2) Weather uncertainties  –  the wild card.

Source: Hong Leong Investment Bank Research - 13 Oct 2014