Palm oil inventory increased for the first time since Dec-17, by 0.8% MoM to 2.19m tonnes, as weaker exports and higher imports outpaced lower production. Although exports to India improved, this was insufficient to offset weaker exports to other major palm oil importing nations (in particularly, China and Pakistan). Maintain 2018-2019 average CPO price assumption of RM2,500/tonne and NEUTRAL stance on the sector.

DATA HIGHLIGHTS

Palm oil inventory increased for the 1st time after 5 consecutive monthly declines, by 0.8% MoM to 2.19m tonnes in Jun-18, as weaker exports and higher imports outpaced lower production.

Against consensus… the stockpile came in higher than Bloomberg consensus estimate of 2.17m tonnes due mainly to weaker-than-expected exports.

Production declined for the 3rd consecutive month… By 11.3% MoM to 1.35m tonnes in Jun-18, likely due to fasting month and Eid Ul Fitr which dragged palm productivity. On a quarterly basis, 2Q18 production declined by 6% YoY to 4.4m tonnes due mainly to the lagged impact of El Nino in end-15, resulting in a shift in cropping pattern last year.

Exports to India recovered, but insufficient to offset weaker exports to other major importing nations. Exports declined for the 3rd consecutive month, by 12.6% MoM to 1.13m tonnes in Jun-18, as higher exports to India (which more than doubled to 160k tonnes from 75k tonnes in May-18) was more than negated by weaker exports to China (-19.4%), EU (-0.6%) and Pakistan (-23.3%). Cargo surveyor Intertek indicated that palm oil shipments fell further (by 14.2% MoM) to 282k tonnes for the first 10 days of Jul-18.

HLIB’s VIEW

Inventory uptrend to sustain into Jul-18. We believe the uptrend in palm oil inventory to sustain into Jul-18, on the back of a seasonal uptrend in palm production and seasonally lower restocking activities (post Ramadhan month).

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

Maintain NEUTRAL. We maintain our NEUTRAL stance on the sector. We expect CPO prices to improve in 2H18 (vs. 1H18), supported by weaker MYR, which is supportive of palm oil prices, (ii) Indian government’s recent move to raise import duties on other soft oils, which has in turn narrowed the duty gap between palm oil and other soft oils, and (iii) potential re-emergence of El Nino. Despite having anticipated CPO prices to trend higher in 2H, we still see challenges in the sector over the longer term, which include, amongst others, potential minimum wage hike (which will affect Malaysian planters’ cost of production, hence earnings).

Source: Hong Leong Investment Bank Research - 11 Jul 2018