Palm oil inventory resumed on a downtrend, falling by 8.6% MoM to 1.57m tonnes in Oct-20, due mainly to lower output (-7.7% MoM) and higher exports (+3.8%). Stockpile will likely remain at low level in coming month, as seasonally stronger output seems to have ended earlier than expected, and this will likely offset weaker exports demand from India and China. CPO price projection wise, we are keeping to our assumptions at RM2,350-2,400/tonne in 2020-21 for now, pending a further review on the sector (with upside bias). We maintain our Neutral stance on the sector. For exposure, our top pick is TSH Resources (BUY; TP: RM1.14).

DATA HIGHLIGHTS

Lowest inventory since Jun-17. Palm oil inventory resumed on a downtrend, falling by 8.6% MoM to 1.57m tonnes in Oct-20, due mainly to lower output (-7.7% MoM) and higher exports (+3.8%). We note the stockpile was broadly in line with Bloomberg consensus median estimate of 1.58m tonnes.

Output: Peninsular region led total output decline. Total output fell 7.7% MoM to 1.72m tonnes in Oct-20, as all states reported lower output during the month (leading by an 11.2% decline in Peninsular Malaysia’s output, while output in East Malaysia fell by a smaller quantum of 3.5%), possibly due to labour shortage arising from the outbreak of Covid-19 (which has in turn restricted the entry of foreign labour into the country).

On a cumulative basis, total output declined by 4% to 16.3m tonnes in 10M20, dragged mainly by weak output in 1Q20 (as a result of lagged impact arising from dry weather experienced in early-2019 and cutback in fertilisers earlier) and recent labour shortage.

Exports. Exports remained on an uptrend, rising by 3.8% MoM to 1.67m tonnes in Oct20, as lower exports to China (-24% MoM) and EU (-23.3%) were more than mitigated by higher exports to India (+13.1%), Pakistan (+33.2%) and US (+105.6%). We believe the recent increase in exports to India was due mainly to its low inventory level and restocking activities ahead of festive season.

Exports for the first 10 days of Nov-20. Cargo surveyor Amspec Agri indicated that palm oil exports fell 19.1% MoM to 428.4k tonnes for the first 10 days of Nov-20.

HLIB’s VIEW

Forecast. Stockpile will likely remain at low level in coming month, as seasonally stronger output seems to have ended earlier than expected, and this will likely offset weaker exports demand from India (in the absence of seasonal demand) and China (as winter season typically reduces China’s demand for palm oil). CPO price projection wise, we are keeping to our assumptions at RM2,350-2,400/tonne in 2020-21 for now, pending a further review on the sector (with upside bias).

Sector rating. We are keeping our NEUTRAL stance on the sector unchanged for now. For exposure, our top pick is TSH Resources (BUY; TP: RM1.14).

Source: Hong Leong Investment Bank Research - 11 Nov 2020