Palm oil inventory in November climbed to 2.56m MT, the highest since Jan 2016, as exports came in below production numbers, despite a decline in the latter. The drop in production was partly due to the seasonal monsoon factor, while exports were lower as key buyers like the EU, India, Pakistan and Turkey bought less palm oil. CPO prices weakened in November and early December as the stock level rose and the RM strengthened against the US$. We maintain our NEUTRAL plantation sector rating with Jaya Tiasa as our top pick.

November CPO Output Declines by 3.3% Mom to 1.94m MT

For November, FFB yields for Peninsular Malaysia and Sarawak declined by 1% and 7.5% mom, respectively, to 1.92 MT/ha and 1.48 MT/ha, while Sabah’s FFB yield improved by 4% mom to 1.8 MT/ha. CPO production in November dropped by 3.3% mom to 1.94m MT, after increasing by 12.9% mom in October. In December, we expect production to be seasonally lower on a mom basis due to the monsoon factor. For 11M17, total CPO production increased by 14.1% yoy to 18.09m MT, and this accounts for about 92.3% of Oil World’s 2017 forecast production of 19.6m MT. Overall, the recovery in 2017 production was largely anticipated after the 2015-16 El Nino phenomenon badly affected production in 2016, and we believe that Malaysia’s CPO production will continue to improve in 2018E, above the 20m MT level.

Exports Dropped as Some Key Buyers Bought Less Palm Oil Products

Palm oil exports declined in November by 11.9% mom to 1.35m MT, as selected key buyers bought less of our palm oil products. Exports to the EU, India, Pakistan and Turkey declined by 22.7%, 39.8%, 25.2% and 34.5% mom, respectively, to 154.9k MT, 100.1k MT, 94k MT and 45.9k MT. For 11M17, total exports increased by 2.4% yoy to 15.13m MT. As palm oil exports still came in below the production volume, inventory continued to build up. Palm oil inventory in November increased by another 16% mom to 2.56m MT. This is the highest level of inventory over the past 23 months (November 2016 inventory: 1.66m MT).

CPO Prices Under Pressure

Average MPOB locally-delivered CPO prices in November declined by 1.7% mom to RM2,689/MT (Oct17 CPO ASP: RM2,736/MT), bringing the 11M17 CPO ASP to RM2,817/MT (11M16 CPO ASP: RM2,607/MT). The drop in CPO ASP during November and early December was partly attributable to the high palm oil stock level that has put pressure on prices as well as the strengthening of the RM against the US$.

Source: Affin Hwang Research - 13 Dec 2017