Palm oil inventory eased further (by 0.8% MoM to 2.39m tonnes in Jul-19), as seasonally higher output was more than mitigated by higher exports and domestic consumption, coupled with lower imports. 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 commences 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 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

12-month low stockpile. Palm oil inventory declined further (by 0.8% MoM to 2.39m tonnes in Jul-19), as seasonally higher output was more than mitigated by higher exports and domestic consumption, coupled with lower imports. Against consensus, the stockpile came in lower than Bloomberg consensus median estimate of 2.47m tonnes.

Output recovered in Jul-19. Output increased by 15.1% MoM to 1.74m tonnes in Jul-19, mainly on seasonal factor. Recall, palm oil output historically dipped MoM in the month of Jun due to Eid Mubarak.

Cumulatively, palm oil output rose by 10.6% to 11.5m tonnes in 7M19, driven mainly by estates in Peninsular Malaysia, which we believe was due mainly to the absence of lagged impact from El Nino.

Exports resumed on uptrend… Rising by 7.4% MoM to 1.49m tonnes, boosted mainly by higher exports of processed palm oil and biodiesel.

Cumulatively, palm oil exports rose by 13.7% to 10.9m tonnes in 7M19, boosted mainly by higher exports to India and China (which collectively account for circa 38% of Malaysia’s total palm oil exports in 7M19).

Palm oil shipment for the first 10 days of Aug-19. Both cargo surveyors (AmSpec Agri and Intertek) indicated that palm oil exports rose significantly (by 35-39% MoM) during the first 10 days of Aug-19.

HLIB’s VIEW

Forecast. We keep to our view that 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 commences in Jul and peaks around Sep/Oct). YTD, CPO spot price averaged at RM1,976/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$139/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 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 - 14 Aug 2019