Palm oil inventory increased for the 2nd consecutive month, by 1.3% MoM to 2.21m tonnes, as higher output more than offset higher exports and domestic consumption. Total exports increased for the 1st time since Mar-18, by 6.8% MoM to 1.21m tonnes, as the decline in exports to major importing countries (such as China, India, Pakistan and US was more than mitigated by higher exports to EU and other smaller importing countries). 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 2nd consecutive month, by 1.3% MoM to 2.21m tonnes in Jul-18, as higher output more than offset higher exports and domestic consumption.

Against consensus… The stockpile came in lower than Bloomberg consensus estimate of 2.24m tonnes lower-than-expected output more than offset lower-thanexpected exports.

Production increased for the 1st time since Mar-18… By 12.8% MoM to 1.5m tonnes in Jul-18, mainly due to seasonal effect, as (i) the MoM decline in Jun-18 was partly due to fasting month and Eid Ul Fitr which dragged palm productivity, and (ii) production typically picks up from Jul and peaks around Sep/Oct. YTD, we note that CPO production in 7M18 declined by 1.1% to 10.4m tonnes, and we believe this is partly due to the lagged impact of El Nino in end-15, resulting in a shift in cropping pattern last year.

Total exports increased despite exports to most major importing countries fell… Total exports increased for the 1st time since Mar-18, by 6.8% MoM to 1.21m tonnes, as the decline in exports to major importing countries such as China (-28.2%), India (-17.7%), Pakistan (-21.3%) and US (-29.8%) was more than mitigated by higher exports to EU (+16.5%) and other smaller importing countries (such as Bangladesh, Ghana, Japan, Philippines and Singapore, which grew notably on a MoM basis).

HLIB’s VIEW

Inventory uptrend to sustain into Aug-18. We believe the uptrend in palm oil inventory to sustain into Aug-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 - 13 Aug 2018