Palm oil inventory resumed on uptrend for the 1st time since Feb-19, rising by 9.3% MoM to 2.45m tonnes, mainly on marginally higher production and lower exports. We believe palm oil stockpile will remain on uptrend in coming months, mainly on the back of the commencement of seasonally higher production cycle, Indian government’s recent move to hike import duty on processed palm oil from Malaysia (by 5%-pts to 50%), and the absence of near-term notable festive-driven demand catalyst (except for Diwali). We are maintaining our average CPO price assumptions of RM2,100/tonne for 2019 (YTD: RM2,000/tonne) and RM2,200/tonne for 2020, as well as Underweight stance on the sector.

DATA HIGHLIGHTS

Stockpile rises for the 1st time in 6 months. Palm oil inventory increased for the 1st

time since Feb-19, by 9.3% MoM to 2.45m tonnes (in line with Bloomberg consensus median estimate), mainly on marginally higher production and lower exports.

Production uptrend continued in Sep-19. Overall production remained on uptrend, rising by 1.1% MoM to 1.84m tonnes, with the MoM decline in Peninsular Malaysia’s production (-4.2% MoM) was more than mitigated by continued MoM increase in East Malaysia’s production. The MoM decline in Peninsular region’s production could be due to lagged impact from dry weather in 1Q19, which has in turn resulted in a delay in ripening of fruits. 9M19 production grew 9.3% to 15.2m tonnes, driven 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).

Exports declined for the 1st time since Jun-19… By 18.8% MoM to 1.41m tonnes in Sep-19, dragged mainly by lower exports of processed palm oil (which, in our view, was due mainly to Indian government’s recent move to hike import duty on processed palm oil from Malaysia, which eliminated Malaysian refiners’ price competitiveness against their regional peers). Geographical wise, we reckon that lower exports to China (-25% MoM) and India (-43.6%) contributed chiefly to the overall MoM decline in exports.

Palm oil shipment for the first 10 days of Oct-19. Both cargo surveyors (AmSpec Agri and Intertek) indicated that palm oil exports declined (on MoM basis) during the first 10 days of Oct-19.

HLIB’s VIEW

Forecast. We believe palm oil stockpile will remain 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), Indian government’s recent move to hike import duty on processed palm oil from Malaysia (by 5%-pts to 50%), and the absence of near-term notable festive-driven demand catalyst (except for Diwali). We are maintaining our average CPO price assumptions of RM2,100/tonne for 2019 (YTD: RM2,000/tonne) 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 Oct 2019