Highlights

• Inventory fell for the third consecutive month, by 1.5% mom to 1.74m tonnes in Feb-15 (but still higher than the consensus median estimate of 1.67m tonnes), mainly on lower opening stocks and production, which more than offset lower exports and domestic consumption. Comparing against the previous month, we note that inventory in Feb-15 declined by a much smaller quantum (of only 27k tonnes vs. a mom decline of 246k tonnes in the previous month), and this was due to the recovery in production from the Peninsular region.

• Total output decline eased to 3.4%. The output recovery in the Peninsular region (+9.9%), coupled with a smaller output decline in the East Malaysia region (-15.3% vis-à-vis 19.4% last month) have eased output decline in Malaysia to 3.4% (vs-a-vis a 15% decline in the previous month).

• Exports continued to decline (by 18.4% mom) to 971.6k tonnes in Feb-15 (the lowest since Jun-07), attributable to several factors, including: (1) the diminished price competitiveness of CPO vs. competing edible oils; and (2) weak exports to China (which was in turn due to Lunar New Year).

• Inventory to resume on uptrend from Mar-15. We believe inventory has bottomed in Feb-15, will resume on uptrend from Mar-15, on the back of output recovery (witnessed by output recovery in the peninsular region) and weak exports demand (arising from the narrow price discount between palm and other competing oils). Cargo Surveyor Intertek Testing Services reported that palm shipments from Malaysia fell by 12% for the first 10 days of Mar-15.

• While the latest set of numbers are negative for near term CPO price, 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 Mar 2015