CPO production in December declined mom mainly due to the monsoon season. Export volumes were stronger as key importers such as the EU, USA, India and Turkey bought more palm oil products. Despite this, the palm oil inventory in December climbed to 2.73m MT, the highest level over the past 24 months. We opine that the suspension of the export tax on palm oil by the Malaysian Government could potentially help stimulate export demand for Malaysian palm oil products and contribute to a decline in the stock level as well as a recovery in domestic palm oil prices. Overall, we maintain our NEUTRAL plantation sector rating and our CPO ASP assumption of RM2,600/MT for 2018E.

CPO Output Declines by Another 5.6% Mom to 1.83m MT

As expected for December, FFB yields for Peninsular Malaysia, Sabah and Sarawak declined by 4.2%, 3.3% and 7.5% mom, respectively, to 1.83 MT/ha, 1.74 MT/ha and 1.35 MT/ha. CPO production declined for a second month in December, down by 5.6% mom to 1.83m MT. Production was seasonally lower due to the monsoon. Nevertheless, for 2017, total CPO production increased by 15% yoy to 19.92m MT (2015 CPO production: 19.96m MT), exceeding Oil World’s 2017 forecast production of 19.6m MT. The recovery in 2017 production was largely anticipated after the 2015-16 El Nino phenomenon, which badly affected production in 2016, and we opine that Malaysia’s CPO production will continue to improve in 2018E, above the 20m MT level for the first time.

Palm Oil Inventory Ends the Year at 2.73m MT, Highest Since Dec15

Palm oil exports improved in December by 4.9% mom to 1.42m MT, as selected key buyers bought more of our palm oil products. Exports to the EU, USA, India and Turkey increased by 34.6%, 25%, 6.9% and 52.8% mom, respectively, to 208.5k MT, 65.9k MT, 107.1k MT and 71.7k MT. For 2017, total exports increased by 3.2% yoy to 16.55m MT. As palm oil exports still came in below the production volume, inventory continued to build up. Palm oil inventory increased further in December, up by 7% mom to 2.73m MT. This is the highest level of inventory over the past 24 months (December 2016 inventory: 1.67m MT). We opine that the suspension of the export tax on palm oil by the Malaysian government, effective 8 January 2018 for a 3-month period, will likely help stimulate export demand for Malaysian palm oil products and could potentially contribute to a decline in the stock level as well as a recovery in domestic palm oil prices.

Source: Affin Hwang Research - 11 Jan 2018