Palm oil stockpile remained on downtrend for the second consecutive month, declining by -4.1% MoM to 2.19m tonnes in Dec-22 (the lowest Aug-22), as lower exports and domestic consumption were offset by lower production. Stockpile will likely remain on downtrend in the next few months, on the back of (i) seasonally low production cycle, (ii) CPO’s wide discount against soybean oil and China’s economy reopening will continue to lift palm oil exports, and (iii) upcoming increase in biodiesel admixture and change in domestic market obligation in Indonesia, which will result in lower palm oil supply from Indonesia, hence boosting palm oil exports demand in Malaysia. Maintain 2023-24 CPO price assumptions of RM4,000/mt and RM3,800/mt, and Neutral stance on the sector. For exposure, we favour integrated players such as KLK (BUY; TP: RM25.19) and IOI (BUY; TP: RM4.16).

DATA HIGHLIGHTS

Lowest stockpile in 4 months. Palm oil stockpile remained on a downtrend for the second consecutive month, declining by -4.1% MoM to 2.19m tonnes in Dec-22 (the lowest since Aug-22), as lower exports and domestic consumption were offset by lower production. The stockpile came in within Bloomberg consensus median estimate of 2.19m tonnes.

Second consecutive month decline in output. Output declined for the second consecutive month, by -3.7% MoM to 1.62m tonnes in Dec-22, due to seasonal factor. During Dec-22, output contribution from Peninsular Malaysia and East Malaysia fell by -3.9% and -3.4% MoM, respectively. In 2022, palm oil output increased by a marginal 1.9% to 18.5m tonnes, driven mainly by a 3.2% growth in Peninsular Malaysia output. Output in East Malaysia, on the other hand, increased by a marginal 0.3%.

Exports were down by -3.5%. Exports declined by 3.5% MoM to 1.47m tonnes in Dec-22, as higher CPO exports (+15.7%) were weighed down a 10% MoM decline in processed palm oil products.

Exports during first 10 days of Jan-23. Preliminary data from Anspec Agri indicated that palm oil shipments tumbled by -51% MoM during the first 10 days of Jan-23.

HLIB’s VIEW

Stockpile will likely remain on a downtrend in the near term. Stockpile will likely remain on a downtrend in the next few months, on the back of (i) seasonally low production cycle, (ii) CPO’s wide discount against soybean oil (~US$537/tonne at the time of writing) and China’s economy reopening will continue to lift palm oil exports, and (iii) upcoming increase in biodiesel admixture and change in domestic market obligation in Indonesia (from 1:8 to 1:6), which will result in lower palm oil supply from Indonesia, hence boosting palm oil exports demand in Malaysia.

Forecast. We maintain 2023-24 CPO price assumptions of RM4,000/mt and RM3,800/mt. We believe CPO price will sustain at above RM4,000/mt over the next few months (possibly until 1Q23), and start trending down from 2Q23 onwards.

Maintain NEUTRAL. We reiterate our Neutral stance on the sector, given the absence of notable earnings growth catalyst. For exposure, we favour integrated players such as KLK (BUY; TP: RM25.19) and IOI (BUY; TP: RM4.16) over purer upstream players, as earnings of integrated players tend to be better insulated amidst volatile palm product price trend.

Source: Hong Leong Investment Bank Research - 11 Jan 2023