Palm oil inventory continued its uptrend, rising by 7.6% MoM to 2.72m tonnes in Oct-18, mainly on seasonally higher output and lower exports. While we believe palm output has already peaked in Oct-18 (taking cue from the MoM decline in Sarawak’s output), the stockpile will remain elevated in coming months, mainly on the back weaker exports (arising from winter season and absence of festivedriven demand). Maintain 2019 average CPO price assumption of RM2,500/tonne and NEUTRAL stance on the sector.

DATA HIGHLIGHTS

Highest stockpile since Dec-17. Palm oil inventory increased for the 5th consecutive month, rising by 7.6% MoM to 2.72m tonnes in Oct-18 (the highest since Dec-17), mainly on seasonally higher output and lower exports.

Against consensus… The stockpile came in lower than Bloomberg consensus estimate of 2.86m tonnes, mainly on the back of stronger-than-expected exports.

Production increased for 5th month straight (albeit at a slower rate)… By 6% MoM to 1.97m tonnes in Oct-18 (vs. 14.4% MoM increase in previous month), due mainly to seasonal effect (as production typically peaks around Sep-Oct).

10M18 CPO production declined by 1.7% to 16.1m 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 dipped 3% MoM… To 1.57m tonnes in Oct-18, as higher exports to China (+94.2% MoM) was more than offset by weaker exports to India (-56.5% MoM, in absence of festive driven restocking activities) and EU region (-27.2%).

Cargo surveyor ITS indicated that Malaysia’s palm oil exports declined by 14.1% MoM during the 1st 10 days of Nov-18, while AmSpect AgriShipments, on the others hand indicated that palm oil exports declined by a smaller margin (0.3%) for the 1st 10 days of Nov-18

HLIB’s VIEW

Stockpile to remain elevated in coming months. While we believe palm output has already peaked in Oct-18 (taking cue from the MoM decline in Sarawak’s output), the stockpile will remain elevated in coming months, mainly on the back weaker exports (arising from winter season and absence of festive-driven demand).

Forecast. We maintain our average CPO price assumption of RM2,500/tonne for 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-tomedium term’s outlook, on the back of absence of demand growth catalyst.

Source: Hong Leong Investment Bank Research - 13 Nov 2018