Palm oil inventory climbed by 4.7% MoM to 1.33m tonnes in Jan-21, as lower output was more than offset by sharply lower 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 encouraging preliminary exports figures in Feb-21. 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

Stockpile climbed in Jan-21. Palm oil inventory climbed from the lowest level since 2007 (by 4.7% MoM to 1.33m tonnes in Jan-21), as lower output was more than offset by sharply lower exports. Against Bloomberg consensus, the stockpile came in higher than the former’s median estimate of 1.21m tonnes, due mainly lower-than-expected exports.

Output: Downtrend continued in Jan-21. Total output remained on downtrend, falling by 15.5% MoM to 1.13m tonnes in Jan-21, dragged by seasonally low production season, further exacerbated by labour shortage (resulting from Covid-19 pandemic, which restricted the entry of foreign labour into the country) and flood in certain states in end-Dec.

Exports: Dragged by seasonality and high prices. Exports plunged 42.3% MoM to 947.4k tonnes in Jan-21, with exports to key export destinations namely, China, India and EU declining by 23.0%, 74.7% and 29.4% MoM, respectively. We believe the plunge in exports was due to mainly to seasonal factor (as demand for palm oil is historically lower during winter season) and high CPO prices (which in turn curtailed demand from price-sensitive countries).

Exports for the first 10 days of Feb-21. Cargo surveyor Amspec Agri indicated that palm oil exports jumped 53.9% Mom to 400k tonnes for the first 10 days of Feb-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 encouraging preliminary exports figures in Feb-21. 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), 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 - 11 Feb 2021