Highlights

• Despite a strong surge in exports, palm oil inventory remained on uptrend, expanding by 2.5% mom to 2.24m tonnes in May-15 (higher than Bloomberg survey’s median estimate of 2.12m tonnes), on the back of a 7.3% increase in production.

• Total output growth slowed (from 13.3% in Apr-15) to 7.3% mom at 1.82m tonnes in May-15, and this was underpinned by output growth from Johor and Pahang in Peninsular region, and East Malaysia region.

• Exports surged by 37.3% mom to 1.61m tonnes in May-15, boosted mainly by sharply higher exports to China (+36.9%), India (+292.3%) and Netherlands (+211%). We believe the sharp increase in exports were due to a combination of factors including: (1) Low inventory level in India; (2) Normalising restocking activities in India; and (3) Weaker RM (against the US$), which has in turn boosted palm’s improved price competitiveness.

• Cargo Surveyor Intertek Testing Services reported that palm shipments from Malaysia increased by 2.2% to 469k tonnes for the first 10 days of June.

• The latest data will unlikely dampen near term CPO prices significantly, given: (1) The weak RM and recent surge in soybean oil price have boosted the price competitiveness of palm oil; (2) The Australian Bureau of Meteorology indicated that El Nino will likely be a severe event; and (3) The implementation of B10 biodiesel programme in Malaysia by Oct-15, which will boost palm oil consumption by 300k tonnes/year.

• YTD, CPO price averaged at RM2,223/tonne. We are maintaining our average CPO price assumptions of RM2,300/mt and RM2,400/mt for 2015-2016.

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 Jun 2015