Palm oil inventory eased for the third consecutive month, by 10.3% MoM to 2.45m tonnes in May-19 (lowest since Aug-18), mainly on the back of higher shipments (led mainly by EU and USA) and domestic consumption. We believe stockpile will continue to ease in Jun-19, underpinned by Malaysian government’s move to exempt palm oil export duty (until end-2019) and seasonally lower palm output. We maintain our average CPO price assumptions of RM2,300/tonne for 2019 and RM2,400/tonne for 2020 (2018: RM2,235/tonne) for now, pending further review. Maintain our UNDERWEIGHT stance on the sector.

DATA HIGHLIGHTS

Stockpile eased further on stronger exports and domestic disappearance. Palm oil inventory declined for the third consecutive month, by 10.3% MoM to 2.45m tonnes in May-19, mainly on the back of higher exports and domestic disappearance, which more than offset a mild increase in palm oil output.

Against consensus, the stockpile was in line with Bloomberg consensus estimate of 2.46m tonnes

Output resumed on uptrend. Although Sabah continued to register lower output (for the second consecutive month), overall output increased by 1.3% MoM to 1.67m tonnes, boosted mainly by higher output from Johor, Pahang and Sarawak.

Exports increased for 3 straight months. Exports increased for the third consecutive month, by 3.5% MoM to 1.71m tonnes in May-19, as lower exports to China (-36.8%) and Pakistan (-10.1%) were more than mitigated by stronger exports to EU region (+42.7%) and USA (+161.2%).

Palm oil shipment for the first 10 days of Jun-19. SGS indicated that palm oil exports fell 32.6% to 377k tonnes for the first 10 days of Jun-19, as a strong surge in exports to China was more than offset by lower shipments to India and EU region.

HLIB’s VIEW

Forecast. We believe stockpile will continue to ease in Jun-19, underpinned by Malaysian government’s move to exempt palm oil export duty (until end-2019) and seasonally lower palm output (arising from Eid Mubarak, which historically resulted in lower palm production). We maintain our average CPO price assumptions of RM2,300/tonne for 2019 and RM2,400/tonne for 2020 (2018: RM2,235/tonne) for now, pending further review.

Maintain UNDERWEIGHT. We maintain our UNDERWEIGHT stance on the sector, underpinned by its pricey valuations, weak near-term outlook (arising from the absence of positive demand catalyst).

Source: Hong Leong Investment Bank Research - 13 Jun 2019