Palm oil inventory declined by 19.0% MoM to 1.26m tonnes in Dec-20 due to lower output and higher exports. Stockpile will likely remain at low level in coming months, as seasonally weaker exports demand from China will be offset by low production (due to seasonal factor, labour shortage and flood in some parts of Malaysia) and low edible stockpile in India. We maintain our CPO price assumption of RM2,700/tonne for 2020-2022 and Neutral stance on the sector. For exposure, our top picks are Hap Seng Plantations (BUY: TP: RM2.17), IJM Plantations (BUY: RM2.29) and TSH (BUY: RM1.38).

DATA HIGHLIGHTS

Multi-year low inventory level. Palm oil inventory remained on a downtrend for the fourth consecutive month, declining by 19.0% MoM to 1.26m tonnes in Dec -20 due to lower output and higher exports. Against Bloomberg consensus, the stockpile came in lower than the former’s median estimate of 1.31m tonnes, mainly due to higher-thanexpected exports.

Output: third consecutive month decline. Total output fell 10.6% MoM to 1.33m tonnes in Dec-20, dragged by seasonally low production season, further exacerbated by labour shortage (resulted from Covid-19 pandemic, which restricted the entry of foreign labour into the country) and flood in certain states in end-Dec.

On a cumulative basis, total output fell 3.6% to 19.1m tonnes in 2020, 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 4Q20 (as a result of labour shortage).

Exports: Helped by sharp increase in exports to India. Exports resumed on uptrend, rising by a whopping 24.7% MoM to 1.62m tonnes in Dec-20, as lower exports to China (-51.0%), EU region (-23.7%), and Pakistan (-28.5%) were more than compensated by a sharp increase in exports to India (+168.9%, following the country’s move to reduce import duty on CPO by 10%-pts to 27.5%). YTD, China and India were Malaysia’s largest export destinations, which collectively accounted for 31.5% of Malaysia’s total palm oil exports in 2020.

Exports for the first 10 days of Jan-21. Cargo surveyor Amspec Agri indicated that palm oil exports fell 35% MoM to 271.8k tonnes for the first 10 days of Jan-21.

HLIB’s VIEW

Forecast. Stockpile will likely remain at low level in coming months, as weaker exports demand from China (as winter season typically reduces China’s demand for palm oil) will be offset by low production (due to seasonal factor, labour shortage and flood in some parts of Malaysia) and low edible stockpile in India (which in turn encourages stock replenishing activities). 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 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: RM2.29) and TSH Resources (BUY; TP: RM1.38).

Source: Hong Leong Investment Bank Research - 12 Jan 2021