Highlights

• Palm oil inventory resumed on uptrend, increasing by 5.3% mom to 2.27m tonnes in Jul-15 (higher than Bloomberg survey’s median estimate of 2.16m tonnes), mainly on higher production (+2.9% mom) and lower exports (-5.6% mom).

• Production reversed to a mom growth of 2.9% in Jul-15 (from -2.6% mom in the previous month). While most states recorded positive mom production growth, Kedah and Sabah states still recorded negative mom production growth of 2.2% and 2.7% respectively.

• Exports declined for the first time (since Apr-15), by 5.6% mom to 1.6m tonnes, mainly on the back of a 19.3% decline in exports to India (-19.3%) and Pakistan (-43.7%), which altogether more than offset higher exports to China and Netherlands (which increased by 14.7% and 49.1% respectively).

• Despite palm’s discount against the soybean oil has recently widened, we believe stockpile will remain high in the coming months, on the back of: rising palm production (and the mom increase in Jul-15’s production is an indication that workers have returned from Raya break).

• CPO price averaged at RM2,215/tonne in 1H, we are maintaining our average projected CPO price of RM2,300/mt for 2015, 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.

Source: Hong Leong Investment Bank Research - 11 Aug 2015