• Malaysia’s palm-oil inventory in Aug20 increased slightly by 0.1% mom to 1.7m MT, the first increase in four months, as total production exceeded consumption, attributable to weaker exports but partially offset by stronger domestic consumption
• After the recovery in CPO prices to current level of RM2,800-2,900/MT, we caution that there could potentially be a pullback in prices amid pressure from rising stock levels towards 4Q20; COVID-19 pandemic is still evolving globally and uncertainties remain in the market
• We keep our CPO ASPs assumptions for 2020-21E at RM2,350-2,450/MT. Maintain NEUTRAL rating on the plantation sector, with IJMP and Ta Ann as our top picks

CPO production in Aug20 was at 1.86m MT, up 3.1% mom

Malaysia’s CPO production in Aug20 was higher as expected, rising by 3.1% mom to 1.86m MT. Production was higher throughout Peninsular Malaysia, Sabah and Sarawak, up 1%, 3.2% and 8.4% mom, respectively, to 1.04m MT, 399.6k MT and 424.2k MT. For 8M20, Malaysia’s CPO production contracted 4.7% yoy to 12.7m MT, mainly attributable to weaker production in 1Q20 due to impact from the lagged effect of dry weather in 2019. CPO production has improved in 2Q20 and we believe it will continue to pick up as we enter the peak production period towards Oct/Nov. For 2020, we expect Malaysia’s 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 palms

Lower exports to India, the EU and Pakistan in Aug20

Malaysia’s palm-oil products exports in Aug20 declined by 11.3% mom to 1.6m MT, as some of our main buyers like India, the EU and Pakistan bought less of our products. Exports to India, the EU and Pakistan was down by 27.6%, 7.5% and 48.5% mom, respectively to 329.8k MT, 159.2k MT and 59.7k MT. We believe exports took a breather after strong demand for Malaysia’s palm-oil products in Jun20-Jul20 due to countries restocking their edible oil inventories as their lockdowns eased and the re-opening of their HORECA (Hotels/Restaurants/Catering) businesses. Overall, we think demand in 2H20 will not be as strong as in 2H19 (but better than 1H20) 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 8M20 declined by 11.6% yoy to 11.2m MT.

Stock level increased by 0.1% mom to 1.7m MT

Malaysia’s palm-oil inventory in Aug20 increased marginally by 0.1% mom to 1.7m MT. This is the first increase in 4 months, as total production exceeded consumption (weaker exports of palm-oil products but partially offset by stronger domestic consumption). We expect Malaysia palm-oil inventory levels to potentially continue to rise towards year-end as we believe production will remain strong as it enters the peak production period towards Oct/Nov.

Source: Affin Hwang Research - 11 Sept 2020