Palm Oil Inventory Eased for the 13th Consecutive Month (by 5.3% MoM to 2.25m Tonnes in Aug-19), as Seasonally Higher Production Was More Than Mitigated by a 16.4% MoM Jump in Exports. We Keep to Our View That Palm Oil Stockpile Will Resume on Uptrend in Coming Months, Mainly on the Back of the Commencement of Seasonally Higher Production Cycle and Indian Government’s Recent Move to Hike Import Duty on Processed Palm Oil From Malaysia, Which Has in Turn Eliminated Malaysian Refiners’ Price Competitiveness Against Their Regional Peers. We Maintain Our UNDERWEIGHT Stance on the Sector, Given Our Less Optimistic View on the Sector’s Murky Outlook and Lofty Valuations.

DATA HIGHLIGHTS

13-month low stockpile. Palm oil inventory declined for the 13th consecutive month (by 5.3% MoM to 2.25m tonnes in Aug-19), as seasonally higher production was more than mitigated by a 16.4% MoM jump in exports. Against consensus, the stockpile came in higher than Bloomberg consensus median estimate of 2.22m tonnes, due mainly to higher-than-expected production.

Production uptrend continued in Aug-19. Production continued to trend up, increasing by 4.6% MoM to 1.82m tonnes in Aug-19. Cumulatively, palm oil production grew 10.8% to 13.35m tonnes in 9M19, driven mainly by estates in Peninsular Malaysia, attributed mainly by a pickup in oil yield in Peninsular Malaysia region (which in turn was due to absence of lagged impact from El Nino, we believe).

36-month high exports. Exports increased for 3rd consecutive month, by 16.4% MoM to 1.73m tonnes in Aug-19, boosted mainly by higher exports of crude and processed palm oil. Geographical wise, we note the strong MoM exports growth was driven by China (+237.4%), India (+22.6%) and Pakistan (+31.3%), which was in turn due to (i) restocking activities ahead of Diwali festival, (ii) increased restocking activities by Indian importers ahead of import duty hike and (iii) Malaysian palm’s better price competitiveness against its Indonesian peers (due to MYR depreciation in Aug-19)

Palm oil shipment for the first 10 days of Aug-19. Both cargo surveyors (AmSpec Agri and Intertek) indicated that palm oil exports declined (by 12-14.9% MoM) during the first 10 days of Sep-19.

HLIB’s VIEW

Forecast. We maintain our view that 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), and Indian government’s recent move to hike import duty on processed palm oil from Malaysia (by 5%-pts to 50%), which eliminated Malaysian refiners’ price competitiveness against their regional peers, hence dragging exports of processed palm oil to India from Malaysia. We note that India is Malaysia’s largest palm oil export destination, which accounted for 28% of the latter’s total palm oil exports and the exports of palm oil to the former has surged by 93.7% in 9M19. 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 pricey valuations.

Source: Hong Leong Investment Bank Research - 11 Sept 2019