• Malaysia’s palm-oil inventory in Nov20 declined further by 0.6% mom to 1.56m MT, the lowest level since Jun17, as total consumption still outweighed production
• CPO prices rose above RM3,600/MT in Dec20, and we believe this is partly attributable to the tight stock levels, concern over weaker-than-expected CPO production, an increase in other edible oil prices, improving sentiment and weather uncertainties
• These factors could potentially continue to support CPO prices in the short term. Maintain NEUTRAL rating on the plantation sector, with IJMP and Ta Ann as our top picks

CPO production in Nov20 was lower at 1.49m MT, down 13.5% mom

Malaysia’s CPO production in Nov20 declined by 13.5% mom to 1.49m MT. We believe this was partly due to heavy rainfall brought on by the seasonal monsoon and La Nina. Production was lower in Peninsular, Sabah and Sarawak, down 14.5%, 13.8% and 10.7% mom respectively to 778k MT, 383.2k MT and 330.4k MT. For 11M20, Malaysia’s CPO production contracted 3.9% yoy to 17.8m MT, mainly attributable to weaker production, especially in 1Q20 due to the impact from the lagged effect of dry weather in 2019, but started to improve from 2Q onwards. For 2020, we expect Malaysia’s CPO production to be lower, potentially down c. 3-4% yoy (2019: 19.9m MT), due to the lagged effect of the dry weather in 2019, lagged effect of lower fertilizer application and labour shortage issues.

Lower exports of palm oil as production declines

In tandem with the lower production, Malaysia’s Nov20 palm-oil product exports declined by 22.2% mom to 1.3m MT, as some of our main buyers like India, Pakistan and the Philippines bought less of our products but partially offset by the increase in demand from countries like China and in the EU (in particular from Italy and Spain). Exports to India, Pakistan and the Philippines were down by 51.9%, 14.8% and 33% mom, respectively to 204k MT, 67k MT and 49k MT. Overall, we believe that demand has improved in 2H20 as compared to 1H20 due to countries restocking their edible oil inventories as their lockdowns ease and the re-opening of their HORECA (Hotels/ Restaurants/Catering) businesses. Nevertheless, Malaysia’s total exports in 11M20 were still lower yoy by 7.8% to 15.7m MT.

Inventory levels declined slightly by 0.6% mom to 1.56m MT

Malaysia’s palm-oil inventory in Nov20 declined by 9.2k MT (or -0.6%) mom to 1.56m MT, the lowest level since Jun17 of 1.53m MT, as total consumption was slightly higher than production. We expect Malaysian palm-oil exports supply to remain tight in the coming few months, partly attributable to the current low stocks and seasonally declining production due to monsoon season.

CPO prices averaged at RM3,422/MT in Nov20, up 14.9% mom

The average MPOB locally-delivered CPO price in Nov20 stood at RM3,422/MT, up 14.9% mom (Nov19 CPO ASP: RM2,493.50/MT). Malaysia’s 11M20 CPO price averaged at RM2,634.50/MT, higher by 29% yoy as compared to RM2,041/MT for 11M19.

CPO prices rose above RM3,600/MT in Dec20

Palm-oil prices reached a high of RM3,600/MT in early-Dec20, from a year-to-date low of RM2,000/MT in May20 and hitting the highest level since Mar11. We believe the recent increase in CPO prices was partly linked to tight stock levels, concerns about smaller-than-expected CPO production, an increase in prices of other edible oils, improving sentiment and weather uncertainties. These factors could potentially help support CPO prices in the coming months, in our view. We keep our CPO assumptions for 2020 at RM2,650-2,700/MT range and 2021 at RM2,650/MT.

Weather: La Nina to last through Northern Hemisphere winter

Based on the US NOAA climate advisory report, there’s a 95% chance that La Nina conditions will last through the winter. The ENSO cycle can greatly influence global weather, which can cause major disruptions to the world’s agricultural production and supply. La Nina would mean more rainfall in Southeast Asia, potentially slowing down the harvesting process due to the wet weather phenomenon. A severe La Nina phenomenon could adversely impact production in early 2021, but on the other hand, CPO prices could remain high due to the reduction in production.

Maintain NEUTRAL on the plantation sector

Overall, we remain NEUTRAL on the plantation sector with pockets of opportunities in the short term supported by the high CPO price environment. Across our coverage, we have BUY ratings on Ta Ann, Jaya Tiasa, IJM Plantations, Genting Plantations and Hap Seng Plantations; and HOLD ratings on KL Kepong, IOI Corp, FGV and SD Plantation. Our top picks for the sector are IJM Plantations and Ta Ann, given their improving earnings prospects with rising FFB and CPO production (given the increase in matured hectarage) and stronger CPO prices. We have HOLD ratings on the larger-cap companies given their quality attributes, which lend support to their rich valuations.

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 Dec 2020