FFB yield and CPO production improved in October across all regions. Exports of palm oil also increased further by 2% mom as buyers like the EU, Pakistan and Vietnam bought more palm oil products. Given the higher CPO production volume compared to the export volume, palm oil inventory in October continued to build, rising up to 2.19m MT (+8.4% mom). We maintain our NEUTRAL plantation sector rating with GENP as our top pick.

FFB Yield and CPO Production Improved in October

For October, FFB yields for Peninsular Malaysia, Sabah and Sarawak improved by 10.1%, 17.4% and 8.7% mom, respectively, to 1.96 MT/ha, 1.75 MT/ha and 1.63 MT/ha. As a result, CPO production in October rebounded by 12.9% mom to 2.01 MT, after declining by 1.7% mom in September. We believe that production, on a mom basis, is likely to be seasonally lower in November after its peak in October. For 10M17, total CPO production increased by 13.1% yoy to 16.14m MT. The recovery in production was largely anticipated after the 2015-16 El Nino phenomenon badly affected production in 2016, and this accounts for about 83.2% of Oil World’s 2017 forecast production of 19.4m MT.

Inventory Building Up

Palm oil exports increased in October by 2% mom to 1.55m MT, as selected key buyers bought more palm oil products. Exports to the EU, Pakistan and Vietnam rose by 84.6%, 6.8% and 43.1% mom, respectively, to 200.4k MT, 136.7k MT and 70.1k MT. For 10M17, total exports have increased by 2.8% yoy to 13.78m MT. Palm oil inventory in October increased further by 8.4% mom to 2.19m MT. Inventory continued building up as palm oil exports still came in below production volume. This is the highest level of inventory over the past 20 months (October 2016 inventory: 1.57m MT). The current stock level is equivalent to 1.4 months of exports, which is still sufficient and manageable, in our view.

CPO Prices Holding Up Well

Average MPOB locally-delivered CPO prices in October were lower at RM2,736/MT, declining slightly by 1.6% mom from RM2,780.50/MT in September, bringing the 10M17 CPO ASP to RM2,832/MT (10M16 CPO ASP: RM2,572/MT). We believe CPO prices have been holding up well given: 1) lower CPO production expectations in November-December; 2) sentiment on the occurrence of La Nina that might disrupt harvesting; 3) soybean prices holding up well; and 4) wide premium between soybean and CPO prices.

Source: Affin Hwang Research - 13 Nov 2017