Palm oil inventory eased further (albeit marginally) by 1% MoM to 2.42m tonnes in Jun-19, mainly on the back of lower output arising (from Eid Mubarak, which historically resulted in palm output). We believe palm oil stockpile will resume on uptrend in coming months, mainly on the back of the commencement of seasonally higher production cycle (which typically commence in Jul and peaks around Sep/Oct). We believe current price level will be cushioned by palm’s discount to soybean oil and ASF outbreak in China (which will continue to support high palm oil consumption in China over the near term). We expect CPO price to recover more meaningfully by 4Q19 (as and when seasonally low production cycle kicks in). Hence, we are maintaining our average CPO price assumptions of RM2,100/tonne for 2019 and RM2,200/tonne for 2020. We maintain our Underweight stance on the sector, given our less optimistic view on the sector’s murky outlook and lofty valuations.

DATA HIGHLIGHTS

11-month low stockpile. Palm oil inventory declined further (albeit marginally), by 1% MoM to 2.42m tonnes in Jun-19, mainly on the back of lower output, which more than offset lower exports and domestic disappearance. Against consensus, the stockpile came in higher than Bloomberg consensus estimate of 2.37m tonnes.

Eid Mubarak dragged output in Jun-19. Output declined by 9.2% MoM to 1.52m tonnes in Jun-19, mainly on the back of Eid Mubarak, which historically resulted in lower palm output.

Cumulatively, palm output increased by 9.8% to 9.8m tonnes in 1H19, as a result of the absence of lingering effects of El Nino.

Exports of processed palm oil weakened MoM. Exports declined for the 1st time since Feb-19, by 19.4% to 1.38m tonnes in Jun-19, dragged mainly by weaker exports for processed palm oil.

Cumulatively, palm oil exports increased by 12.4% to 9.4m tonnes in 1H19, boosted mainly by higher exports to India and China (which collectively account for 38.3% of Malaysia’s total palm oil exports in 1H19).

Palm oil shipment for the first 10 days of Jun-19. Cargo surveyor AmSpec Agri indicated that palm oil exports fell 2.4% to 368k tonnes for the first 10 days of Jul-19.

HLIB’s VIEW

Forecast. We believe palm oil stockpile will resume on uptrend in the coming months, mainly on the back of the commencement of seasonally higher production cycle (which typically commence in Jul and peaks around Sep/Oct). YTD, CPO spot price averaged at RM1,984/tonne. While the commencement of seasonally higher production will cap CPO price at depressed level, we believe current price level will be cushioned by palm’s discount to soybean oil (US$163/tonne vs. 5-year average of US$120/tonne) and African Swine Flu (ASF) outbreak in China (which will continue to support high palm oil consumption in China over the near term). We expect CPO price to recover more meaningfully by 4Q19 (as and when seasonally low production cycle kicks in). Hence, we are maintaining our average CPO price assumptions of RM2,100/tonne for 2019 and RM2,200/tonne for 2020.

Maintain UNDERWEIGHT. We maintain our UNDERWEIGHT stance on the sector, given our less optimistic view on the sector’s murky outlook and lofty valuations.

Source: Hong Leong Investment Bank Research - 11 Jul 2019