• Malaysia’s palm-oil inventory in July20 declined by 10.6% mom to 1.7m MT, the lowest level since June17, as total consumption exceeded production, attributable to strong exports due to restocking activities.
• After the rally in CPO prices (+19%/+40% over the past one/three months), we caution that there could potentially be a pullback in prices amid pressure from rising stock levels towards 4Q20.
• We keep our CPO ASP assumptions for 2020-21E at RM2,350-2,450/MT. Maintain NEUTRAL rating on the plantation sector, with IJM Plantations as our top pick.

CPO Production in July20 Was at 1.81m MT, Down 4.1% Mom

Malaysia’s CPO production in July20 declined by 4.1% mom to 1.81m MT, after a high base in June20. Production was lower in Peninsular Malaysia and Sabah, down 4.9% and 13.9% mom, respectively, to 1.03m MT and 387.3k MT, but partially offset by higher production in Sarawak, which was up by 10.7% mom to 391.4k MT. For 7M20, Malaysia’s CPO production contracted 5.8% yoy to 10.9m MT, mainly due to weaker production in 1Q20 due to the lagged effect of dry weather in 2019. We believe production will pick up again as we enter the peak production period towards Oct/Nov and the effect of dry weather normalises. We expect Malaysia’s 2020 CPO production to be lower, potentially down c.1-2% 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 trees.

Strong Demand From Key Buyers India, Iran and the EU

Malaysia’s palm-oil products exports in July20 improved by another 4.2% mom to 1.78m MT, driven by key buyers India, Iran and the EU. Exports to India, Iran and the EU were up by 85%, >600% and 33.7% mom, respectively to 455.3k MT, 92.4k MT and 170.2k MT. We believe the strong demand for Malaysia’s palm-oil products in July20 was due to some countries restocking more of their edible oil inventory as their lockdown eased and the re-opening of their HORECA (Hotels/Restaurants/ Catering) businesses, coupled with Malaysia’s zero export duty rate on CPO, beginning June20 until year-end (from 4.5% export duty rate in May20). We believe demand for palm oil should remain healthy in the near term spurred by countries restocking more amid fears of a second wave. Nevertheless, we think demand in 2H20 will not be as strong as in 2H19 as fewer gatherings/events, higher unemployment levels and lower disposable income will lead to lower yoy consumption of global edible oils. Malaysia’s total exports in 7M20 declined by 12% yoy to 9.6m MT.

Stock Level Declined to 1.7m MT, Lowest Level Since June17

Malaysia’s palm-oil inventory in July20 declined by 200.3k MT mom (or -10.6%) to 1.7m MT, the lowest level since June17, as total consumption exceeded production given the strong exports of palm-oil products. Nevertheless, we still expect palm-oil inventory levels to potentially rise towards 4Q20 as we believe production will remain strong as it enters the peak production period towards Oct/Nov.

CPO Prices in July20 Averaged at RM2,519/MT, Up 4.5% Mom

The average MPOB locally-delivered CPO price in July20 stood at RM2,519/MT, up 4.5% mom (July19 CPO ASP: RM1,879/MT). Malaysia’s 7M20 CPO price averaged at RM2,448.50/MT, higher by 23.8% yoy as compared to RM1,977/MT for 7M19.

Cautious on Sustainability of CPO Prices

We have seen some price recovery from the low in May20 to the current RM2,850/MT (+40%), partly attributable to the decline in stock levels as demand from several key importing countries picked up strongly due to restocking activities, improving consumer sentiment, the increase in other vegetable oil prices and weather uncertainties (potential appearance of La Nina by year-end). Nevertheless, we caution that there could potentially be a pullback in prices amid rising stock levels in producing countries (as we think palm-oil production will outweigh total consumption towards 4Q20) and rising concerns on a COVID-19 second wave at key importing countries, but we believe the decline will not revert to the YTD low. We keep our CPO ASP assumptions for 2020-21E at RM2,350-2,450/MT.

We think the catalyst for CPO prices in the short term would be demand due to restocking activities, reopening of the hospitality industry, and expectation of La Nina making an appearance by year-end. Meanwhile, the downside to our CPO forecast would be from prolonged uncertainties in the market due to COVID-19 and low crude oil prices.

Weather: La Nina Could Make An Appearance Towards Year-end

Based on the US NOAA climate advisory report, the combined oceanic and atmospheric system remained consistent with ENSO-neutral at the moment (neither El Nino or La Nina is present). However, the odds of La Nina developing in the fall and lasting through the winter is now higher at 50-55%, while chances for ENSO-neutral is 40-45%. The ENSO cycle can greatly influence global weather, which can cause major disruptions to the world’s agricultural production and supply. La Nina means more rainfall in Southeast Asia, thus potentially slowing down the harvesting process due to the wet weather.

Maintain NEUTRAL on Plantation Sector

Across our coverage, we have BUY ratings on Ta Ann, Jaya Tiasa, IJM Plantations and Hap Seng Plantations; HOLD ratings on KL Kepong, IOI Corp, Genting Plantations, FGV and SD Plantation. For sector exposure, we prefer IJM Plantations given its improving earnings prospects with rising FFB and CPO production (given the increase in matured hectarage) and stronger CPO prices.

Key Risks for the Plantation Sector

Key risks to our NEUTRAL rating on the sector include: (i) stronger-/weaker-thanexpected demand and lower-/higher-than-expected production affecting the prices of vegetable oils; (ii) stronger-/weaker-than-expected exports of palm-oil products; (iii) stronger-/weaker-than-expected biodiesel production especially in Indonesia and Malaysia; and (iv) changes in policies and taxes.

Source: Affin Hwang Research - 11 Aug 2020