Malaysia’s palm-oil inventory in June20 declined by 6.3% mom to 1.9m MT, as total consumption exceeded production given the strong exports due to restocking and reopening of the HORECA division. We expect stock levels to rise in 2H20 as demand from the food industry and energy sectors remains affected by the COVID-19 pandemic and volatile crude oil prices, thus impacting the CPO prices. Maintain our Neutral rating on the plantation sector, with Ta Ann as our top pick.

CPO Production in June20 Was at 1.89m MT, Up 14.2% Mom

Malaysia’s CPO production in June20 was at its highest level since Oct18 at 1.89m MT (+14.2% mom / +24.8% yoy) as production was higher in Peninsular Malaysia and Sarawak, up 24.5% and 7.2% mom, respectively to 1.08m MT and 353.5k MT, but partially offset by lower production in Sabah. CPO production in Sabah declined by 0.5% mom to 449.6k MT. For 6M20, Malaysia’s CPO production contracted 7.5% yoy to 9.05m MT, mainly due to the weaker production in 1Q20. We believe production will remain strong in 3Q and peak in Oct/Nov as the lagged effect of dry weather (from 2019) normalises. Nevertheless, we expect Malaysia’s 2020 CPO production to be lower, potentially down by c.1-3% yoy (2019: 19.9m MT), due to the lagged effect of the dry weather in 2019, lagged effect of lower fertilizer application and minimal new plantings of oil palm.

Higher June20 Exports Due to Restocking and Reopening of HORECA

Malaysia’s palm-oil exports in June20 improved by another 24.9% mom to 1.71m MT, driven by key buyers China, India, Pakistan and Turkey. Exports to China, India, Pakistan and Turkey were up by 55.6%, >100%, 35.5% and 69.3% mom, respectively to 351.5k MT, 246k MT, 131.6k MT and 71.9k MT. We believe the sharp increase in demand for Malaysia’s palm-oil products in June20 was due to some countries restocking their edible oils inventories as their lockdowns eased and the re-opening of their HORECA (Hotels/Restaurants/Catering) division, coupled with Malaysia reducing its export duty rate on CPO to zero for June20 until year-end (from 4.5% export duty rate in May20). After restocking activities are completed, we believe demand in 2H20 will be impacted by less gatherings/events, higher unemployment levels and lower disposable income, which could potentially lead to lower yoy consumption of global edible oils and thus, reducing Malaysia’s palm-oil exports. Malaysia’s total exports in 6M20 declined by 17% yoy to 7.8m MT.

Source: Affin Hwang Research - 13 Jul 2020