Palm oil inventory rose for the 7th consecutive month, by 6.9% MoM to 3.22m tonnes in Dec-18, as higher opening stock more than offset seasonally lower output and mildly higher exports and domestic disappearance. We believe stockpile will ease in Jan-19, on the back of seasonally lower output, festivedriven demand (CNY in early-Feb) and India’s recent move to cut import duties on CPO and refined palm oil (by 4 %-pts and 9%-pts to 40 and 45% respectively), which in turn bodes well for palm oil exports. We maintain our average CPO price assumptions of RM2,300/tonne for 2019 and RM2,400/tonne for 2020, as well as our NEUTRAL stance on the sector. DATA HIGHLIGHTS

Record high stockpile. Palm oil inventory increased for the 7th consecutive month, rising by 6.9% MoM to 3.22m tonnes in Dec-18 (highest in history), as higher opening stock more than offset seasonally lower output and mildly higher exports and domestic disappearance.

Against consensus… The stockpile came in higher than Bloomberg consensus estimate of 3.14m tonnes, mainly on the back of higher-than-expected output (market projected output of 1.78m tonnes vs. actual output of 1.81m tonnes), which more than offset lower-than-expected exports (market projected exports of 1.47m tonnes vs. actual exports of 1.38m tonnes).

Production declined for the 2nd straight month (albeit marginally)… by 6.1% to 1.81m tonnes in Dec-18, due mainly to seasonal effect (as production typically eases for 4-5 months after reaching its peak around Sept-Oct). For 2018, CPO production declined by 2% to 19.52m tonnes, due to mainly to seasonal effect (as production typically peaks around Sep-Oct).

Total exports inched up marginally… by 0.6% MoM to 1.38m tonnes in Dec-18, as lower exports to EU region (-37.3%) was more than mitigated by higher exports to China (+55.6%), India (+17.3%) and Pakistan (+23.2%). Cargo surveyors (Amspec and ITS) estimated that Malaysia’s palm oil exports rose 52.9% and 46.6% MoM during the 1st 10 days of Jan-19.

HLIB’s VIEW

Stockpile to ease in Jan-19. After 7 months of continuous increase, we believe stockpile will ease in Jan-19, on the back of seasonally lower output, festive-driven demand (CNY in early-Feb) and India’s recent move to cut import duties on CPO and refined palm oil (by 4 %-pts and 9%-pts to 40 and 45% respectively), which in turn bodes well for palm oil exports.

Forecast. We maintain our average CPO price assumptions of RM2,300/tonne for 2019 and RM2,400/tonne for 2020 (2018: RM2,235/tonne).

Maintain NEUTRAL. While we believe CPO price has bottomed (now at RM2,036/tonne), we do not expect CPO price to jump significantly higher either in the absence of major demand catalyst.

Source: Hong Leong Investment Bank Research - 11 Jan 2019