Palm oil inventory remained on a downtrend, falling by 0.6% MoM to 1.56m tonnes in Nov-20, as higher imports and lower exports were more than offset by lower output and higher domestic consumption. Stockpile will likely remain at low level in coming months, as weaker exports demand from India (in the absence of seasonal demand) and China (as winter season typically reduces China’s demand for palm oil) will be offset by low production season. We maintain our CPO price assumption of RM2,700/tonne for 2020-2022. We maintain our Neutral stance on the sector. For exposure, our top picks are Hap Seng Plantations (BUY: TP: RM2.17), IJM Plantations (BUY: RM2.17) and TSH (BUY: RM1.38).

DATA HIGHLIGHTS

Lowest inventory since Jun-17. Palm oil inventory remained on a downtrend, falling by 0.6% MoM to 1.56m tonnes in Nov-20, as higher imports and lower exports were more than offset by lower output and higher domestic consumption. We note the stockpile was broadly in line with Bloomberg consensus median estimate of 1.55m tonnes.

Output: second consecutive month decline. Total output fell 13.5% MoM to 1.49m tonnes in Nov-20, with all states reporting lower output during the month (caused by a 14.5% decline in Peninsular Malaysia’s output, while output in East Malaysia fell by a smaller quantum of 12.4%), as low production season has kicked in since Oct-20, and this was further exacerbated by 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 3.9% to 17.8m tonnes in 11M20, 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: Dragged by lower exports to China, EU and Pakistan. Exports declined for the first time since Aug-20, by 22.2% MoM to 1.3m tonnes in Nov-20, as higher exports to China (+58.5%) and EU (+50.8%) were more than offset by sharply lower exports to India (-51.9%), Pakistan (-14.8%) and US (-95.5%).

Exports for the first 10 days of Dec-20. Cargo surveyor Amspec Agri indicated that palm oil exports fell 10% MoM to 399.1k tonnes for the first 10 days of Dec -20.

HLIB’s VIEW

Forecast. Stockpile will likely remain at low level in coming months, as weaker exports demand from India (in the absence of seasonal demand) and China (as winter season typically reduces China’s demand for palm oil) will be offset by low production season. We maintain our CPO price assumption of RM2,700/tonne for 2020-2022. We believe CPO price will remain elevated (at above RM3,000/mt mark) until 1Q21. Beyond 1Q21, we anticipate CPO price to soften, on the back of better supply outlook for major edible oils (based on the assumptions that labour shortage in Malaysia will gradually ease from 2021 onwards and La Nina does not strengthen further), which will in turn result in more balanced demand-supply dynamics

Sector rating. We maintain our Neutral rating on the sector, as we believe current high CPO price will not sustain over the longer term. For exposure, our top picks are Hap Seng Plantations (BUY; TP: RM2.17), IJM Plantations (BUY; TP: RM2.17) and TSH Resources (BUY; TP: RM1.38).

Source: Hong Leong Investment Bank Research - 11 Dec 2020