Palm oil inventory increased for the 3rd consecutive month, by 12.4% MoM to 2.5m tonnes, mainly on the back of higher output and lower exports. Total exports resumed to a downtrend mode, declining by 8.1% MoM to 1.1m tonnes, mainly on lower exports to the EU region 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 3rd consecutive month, by 12.4% MoM to 2.5m tonnes in Aug-18, mainly on the back of higher output and lower exports.

Against consensus… The stockpile came in higher than Bloomberg consensus estimate of 2.4m tonnes, mainly on the back of lower-than-expected exports.

Production increased for 2nd month straight… By 7.9% MoM to 1.6m tonnes in Aug-18, due mainly to seasonal effect (as production typically picks up from Jul and peaks around Sep-Oct). CPO production in 8M18 declined by 2.5% to 12.4m 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 declined MoM… Total exports declined by 8.1% to 1.1m tonnes in Aug-18, dragged mainly by lower exports to the EU region (-49%) and Pakistan (- 27.3%), but partly offset by higher exports to India (+5.8%).

HLIB’s VIEW

Inventory uptrend to sustain into Sep-18. We believe the uptrend in palm oil inventory to sustain into Sep-18, on the back of a seasonal uptrend in palm production and seasonally lower restocking activities (in absence of major festive seasons).

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 Sept 2018