Palm oil inventory increased for the 4th consecutive month (albeit at a much slower pace), by 1.4% MoM (vs. 13.1% mom in Aug-18) to 2.54m tonnes in Sep- 18, as higher output and lower domestic consumption were moderated by a sharp increase in exports (which was due to restocking activities ahead of Diwali festival in early Nov-18) and higher crude oil prices (which resulted in improved demand for biodiesel). The uptrend in palm oil inventory should sustain into Oct-18, on the back of a seasonal uptrend in palm production and seasonally lower restocking activities (in absence of major festive seasons). 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 4th consecutive month (albeit at a much slower pace), by 1.4% MoM (vs. 13.1% mom in Aug-18) to 2.54m tonnes in Sep-18, as higher output and lower domestic consumption were moderated by a sharp increase in exports.

Against consensus… The stockpile came in higher than Bloomberg consensus estimate of 2.49m tonnes, mainly on the back of lower-than-expected exports.

Production increased for 4th month straight… By 14.4% MoM to 1.85m tonnes in Sep-18, due mainly to seasonal effect (as production typically picks up from Jul and peaks around Sep-Oct). 9M18 CPO production declined by 1.7% to 13.9m tonnes, and we believe this is partly due to the lagged impact of El Nino in end-2015, resulting in a shift in cropping pattern in 2017-18.

Total exports recovered significantly… By 47.2% MoM to 1.62m tonnes in Sep-18, due to a strong pick-up in exports to India (+64% MoM), EU region (+185.2% MoM) and Pakistan (+86% MoM), due mainly to seasonal factor (restocking activities ahead of Diwali festival in early Nov-18) and higher crude oil prices (which resulted in improved demand for biodiesel).

Both cargo surveyors (AmSpec Agri and Intertek) indicated that Malaysia’s palm oil exports declined by ~30% MoM during the 1st 10 days of Oct-18.

HLIB’s VIEW

Inventory uptrend to sustain into Oct-18. We believe the uptrend in palm oil inventory will sustain into Oct-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. While the increased likelihood of El Nino developing (by end-2018) will be supportive of near term palm oil prices, we are maintaining our less optimistic on the sector’s near-to medium term’s outlook, on the back of absence of demand growth catalyst.

Source: Hong Leong Investment Bank Research - 11 Oct 2018