Palm oil inventory eased marginally (by 0.5% MoM) to 2.03m tonnes in May-20, due mainly to higher exports (which was in turn driven by higher exports to China, India and Pakistan). Inventory will likely remain at above 2m tonnes in the coming months, on the back of seasonally higher output. We maintain our 2020-2021 average CPO price assumptions of RM2,350-2,400/mt for now, as we believe it takes time before full-swing demand recovery takes place. Hence, we are keeping our Neutral stance on the sector unchanged.

DATA HIGHLIGHTS

Higher exports helped easing palm oil inventory. Palm oil inventory eased marginally (by 0.5% MoM) to 2.03m tonnes in May-20, due mainly to higher exports. The stockpile came in lower than Bloomberg consensus median of 2.22m tonnes, due mainly to output shortfall and higher-than-expected exports.

Output – strong output growth in Sabah was offset by lower output in Peninsular region. Output declined marginally (by 0.1% MoM) to 1.65m tonnes in May-20, as output growth in East Malaysia (Sabah: +13.3%; Sarawak: +3.3%) was more than offset by lower output in Peninsular region (-6.9%). On a cumulative basis, output declined by 13.5% to 7.16m tonnes in 5M20, dragged by (i) dry weather experienced in early-2019 and (ii) cutback in fertilisers earlier (amidst low CPO price environment).

Exports – lifted by higher exports to China, India and Pakistan. Exports increased for the third consecutive month, by 10.7% MoM to 1.37m tonnes in May-20, helped by higher exports to China (+13.3%), India (+217.1%), and Pakistan (+56.6%). India has been importing more palm oil from Malaysia since Apr-20 (albeit from a low base impact), due to improved business ties between India and Malaysia and its dwindling vegetable oil stockpile (see Figure #4), we believe. On a cumulative basis, exports fell 23.8% to 7.9m tonnes in 5M20, due mainly to Covid-19 pandemic and trade spat with India, which have collectively resulted in exports to China and India declining by 65.4%.

Exports for first 10 days of Jun-20. Cargo surveyor Amspec Agri indicated that palm oil exports increased by 59.5% MoM to 550k tonnes for the first 10 days of Jun- 20

HLIB’s VIEW

Forecast. Inventory will likely remain at above 2m tonnes in the coming months, on the back of seasonally higher output. Since early-May, CPO spot price has recovered by >15%, fuelled by several positive development including (i) easing Covid-19 lockdown measures, (ii) improved business ties between Malaysia and India, (iii) Indonesian government’s commitment on B30 programme, and (iv) Malaysian government’s recent move to exempt export duty on palm oil products (including CPO, CPKO, and RBDCPKO). We maintain our 2020-2021 average CPO price assumptions of RM2,350-2,400/mt for now, as we believe it takes time before full swing demand recovery takes place. Besides, we note current Palm Oil-Gas Oil (POGO) spread remains uneconomically viable for discretionary blending.

Sector rating. We are keeping our NEUTRAL stance on the sector unchanged, as we believe recent positive news flows have already been reflected in our assumptions.

Source: Hong Leong Investment Bank Research - 11 Jun 2020