Highlights

• Inventory fell for the second straight month, by 12.2% mom to 1.77m tonnes in Jan-15 (slightly higher than consensus median estimate of 1.75m tonnes), mainly on the back of a 15% mom decline in production, which more than offset a 22.1% decline in exports.

• Total production fell 15% mom to 1.16m tonnes, as floods in Peninsular Malaysia exacerbated the impact of seasonal decline in output.

• Exports declined by 22.1% mom to 1.18m tonnes in Jan- 15, due to 13.5-57.7% mom decline in exports to the top 5 key export destinations, namely China (-16%), India (-57.7%), Netherlands (-13.5%), Pakistan (-14.1%) and the USA (- 15.5%). The sharp decline was driven by several factors, in our view, and these include: (1) intense competition from competing soybean oil resulting from the sharp decline in competing soybean oil relative to the palm oil; and (2) India’s implementation of higher import duty on CPO effective end- Dec and this has weakened India’s appetite for palm oil. Cargo Surveyor Intertek Testing Services reported that palm oil shipment fell by 16% mom to 299k tonnes for the first 10 days of Feb-15.

• Despite the weak exports demand, we believe the Indonesian government’s proposed hike in biodiesel subsidies (if approved) will likely boost demand for palm oil, hence supporting palm oil prices.

• Maintain average CPO price projection of RM2,300/tonne for 2015 and RM2,400/tonne for 2016 respectively.

Catalysts

• Implementation of higher biodiesel 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
• Escalating production cost (in particularly, labour cost)

Rating

NEUTRAL

Positives

• Long term sector outlook remains favourable

Negatives

• Weak demand and price outlook

Top picks

• None.

Source: Hong Leong Investment Bank Research - 11 Feb 2015