Highlights

• Palm oil inventory declined for the first t ime since Feb-15, by 4.3% mom to 2.15m tonnes in Jun-15, mainly on lower production (-2.6%) and higher exports (+5.2%). The inventory is slightly lower than Bloomberg survey’s median estimate of 2.18m tonnes.

• Total output declined by 2.6% to 1.76m tonnes in Jun-15, with most states started registering lower FFB yield.

• Exports continued to rise for the second consecutive month (by 5.2% to 1.7m tonnes in Jun-15), due to higher exports to India (+27.1%) and Pakistan (+22.6%), which could in turn be driven by normalising restocking activities in India and the improved price competitiveness of palm oil against soybean oil (which boosted imports from price sensitive consumers such as India and Pakistan).

• Looking forward, we believe inventory will likely remain on a downtrend in Jul-15, on the back of Raya holidays (which will drag output), Weak MYR and palm’s widened price discount against the soybean oil, which will support demand for palm oil as well as prices.

• CPO price averaged at RM2,228/tonne in 1H, we are maintaining our average projected CPO price of RM2,300/mt for the full-year, as we are holding the view that El Nino phenomenon (which continues to strengthen and likely last throughout end-2015, according to weather forecasters) and palm’s widened price discount against the soybean oil, will support higher palm oil prices in the 2H.

• Maintain our average CPO price assumption of RM2,400/mt for 2016. We maintain our Neutral stance on the sector

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.