• Malaysia’s palm-oil inventory in Dec20 declined further by 19% mom to 1.26m MT, the lowest level since Jun07, as consumption still outweighed production
• CPO prices rose above RM3,900/MT in Jan21, and we believe this is partly attributable to the tight stock levels, concerns over weaker-than-expected CPO production and an increase in prices for other edible oils
• 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 Dec20 Was Lower at 1.33m MT, Down 10.6% Mom

Malaysia’s CPO production in Dec20 declined by 10.6% mom to 1.33m 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 9.9%, 14.9% and 7.2% mom respectively to 701k MT, 326.1k MT and 306.5k MT. For 2020, Malaysia’s CPO production contracted 3.6% yoy to 19.14m MT, mainly attributable to weaker production, especially in 1Q20 due to the impact from the lagged effect of dry weather in 2019 though it started to improve from 2Q onwards, and the lagged effects of lower fertilizer application and labour shortages. For 2021, we expect Malaysia’s CPO production to be higher, potentially up c. 2-4% yoy, mainly due to better weather conditions after the lagged effect of dry weather in 2019 affected palm-oil production in 2020.

Higher Dec20 exports prior to reinstatement of Malaysia’s export tax in Jan21

Malaysia’s Dec20 palm-oil product exports increased by 24.7% mom to 1.62m MT, as some of our main buyers like India, the Philippines and Turkey bought more of our products, but partially offset by the decline in demand from countries like China and the EU (in particular from Italy and Spain). Exports to India, the Philippines and Turkey were up by >100%, 14.8% and >100% mom, respectively to 548.4k MT, 56.2k MT and 79k MT. We believe the strong increase in palm-oil product exports in Dec20 was partly attributable to expectations of reinstatement of Malaysia’s export tax effective 1 January 2021. To note, Malaysia‘s export tax on CPO stands at 8%, effective 1-31 January 2021 from 0% in December 2020. Overall, 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, and we believe demand is likely to improve further going into 2021. Nevertheless, Malaysia’s total exports in 2020 were still lower yoy by 6% to 17.37m MT.

Inventory Levels at 1.26m MT, Lowest Since Jun07

Malaysia’s palm-oil inventory in Dec20 declined by 296.9k MT (or -19%) mom to 1.26m MT, the lowest level since Jun07 of 1.2m MT, as consumption exceeded production mainly due to higher exports. We expect Malaysian palm-oil exports supply to remain tight in the coming 1-2 months, partly attributable to the current low stocks and seasonally declining production due to the monsoon season

CPO Prices Averaged at RM3,620.50/MT in Dec20, Up 5.8% Mom

The average MPOB locally-delivered CPO price in Dec20 stood at RM3,620.50/MT, up 5.8% mom (Dec19 CPO ASP: RM2,813/MT). Malaysia’s 2020 CPO price averaged at RM2,685.50/MT, higher by 29.2% yoy as compared to RM2,079/MT for 2019.

CPO Prices Rose Above RM3,900/MT in Jan21

Palm-oil prices have seen a V-shaped recovery in 2020 (the high of RM3,100/MT in Jan20 to a low of RM2,000/MT in May20 and back up to RM3,800/MT in Dec20) and we believe prices will remain supported going into 1H21, underpinned by tight stock levels, concerns about CPO production given the weather uncertainties and strong prices of other edible oils. These factors could potentially help support CPO prices in the coming months, in our view. We keep our CPO assumptions for 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). 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 - 12 Jan 2021