DATA HIGHLIGHTS

Palm oil inventory declined for the 3 rd consecutive month, by 6.2% mom to 2.32m tonnes in Mar-18, as higher production was more than mitigated by higher exports and domestic consumption (which increased by 19.2% and 20.1% mom, respectively).

Against Consensus. The stockpile came in higher than Bloomberg consensus estimate of 2.28m tonnes, mainly on higher-than-projected production (1.49m tonnes vs. 1.57m reported).

Seasonal Output Recovery Has Started. Production resumed on uptrend for the 1st time since Oct-17, by 17.2% mom to 1.57m tonnes due to seasonal factor (historically, palm production picks up from Mar). We note that the production pickup in Peninsular Malaysia (+21.2% mom) was more pronounced compared to East Malaysia (+12.7%), and we believe this is due mainly to the fact that the seasonal output downtrend started earlier in Peninsular Malaysia. Recall, production in Peninsular Malaysia started declining in Nov-17, while production in East Malaysia only started declining the following month. On quarterly basis, 1Q18 production increased by 12.6% yoy to 4.5m tonnes mainly due to the absence of lagged impact from El Nino (recall, palm production was still recovering from the lagged impact from El Nino in early-2017).

Exports Resumed on Uptrend. Exports grew by 19.2% mom to 1.57m tonnes in Mar- 18, boosted mainly by higher exports to China (+28%), India (+25.9%) and India (+71.2%).

HLIB’s VIEW

Inventory to Decline Further in Apr-18. We believe palm oil inventory will decline further in Apr-18, as the seasonal uptrend in production will be more than mitigated by Malaysian government’s decision to extend the suspension of CPO export duty until 30 Apr 2018 (or until palm oil inventory falls to 1.6m tonnes), and restocking activities ahead of Ramadhan month (beginning from mid-May).

On a separate note, cargo surveyor Amspec Malaysia estimated that Malaysia’s palm oil exports rose 25.6% to 450k tonnes for the first 10 days of Apr-18.

Forecast. We maintain our average CPO price assumption of RM2,500/tonne for 2018 and 2019.

Maintain NEUTRAL. Maintain Neutral stance on the sector, due to the lack of strong demand catalyst for palm oil. While La Nina and the Government’s recent move to suspend CPO export taxes will lend support to near-term CPO prices, these are just short-term catalysts. CBIP (TP: RM2.08) is our top sector pick.

Source: Hong Leong Investment Bank Research - 11 Apr 2018