Jun-15 palm oil stocks at 2.15m MT came within our (2.15m MT) and consensus (2.18m MT) expectations. Production declined (-3% to 1.76m MT) as expected, while exports improved 5% to 1.70m MT, slightly above expectations. Indian demand rose for the second month in a row (+27% to 0.44m MT) likely due to strong festive demand coupled with weak domestic edible oils production. Looking ahead, we expect Jul-15 production to rise 6% to 1.90m MT, on track to peak production in Aug/Sep. Demand-wise, we think exports may edge down 1% to 1.68m MT in line with historical patterns, though it could increase should the Indonesian levy be implemented as scheduled. However, we refrain from imputing the levy impact given the multiple delays in implementation. Overall, we expect Jul-15 inventory to increase 1% to 2.18m MT, although should the levy be implemented mid-Jul, we think inventory could close slightly lower (-1% to 2.13m MT). Maintain NEUTRAL on plantations with unchanged FY15-16E CPO forecasts of RM2,200-RM2,400/MT. Nearterm CPO prices are likely to trade range-bound on ample supply, despite improving export demand; while mid-term prices should recover post-peak production season. Maintain OUTPERFORM on IOICORP (TP: RM4.50), TAANN (TP: RM4.80) and CBIP (TP: RM2.49); MARKET PERFORM on SIME (TP: RM9.04), KLK (TP: RM21.80), PPB (TP: RM16.50), FGV (TP: RM1.75), GENP (TP: RM10.42), IJMPLNT (TP: RM3.73), TSH (TP: RM2.45), and UMCCA (TP: RM6.70).

 

Jun-15 closing stock at 2.15m MT meets expectations.

Jun-15 month-end inventory declined 4% to 2.15m metric tonnes (MT), within both our forecast (2.15m MT) and consensus expectation (2.18m MT). As expected, production declined (-3% to 1.76m MT), making up 99% and 103% of consensus and our forecasts, respectively. Exports rose 5% to 1.70m MT, slightly above both consensus (1.68m MT) and our forecast (1.65m MT) by 1% and 3%, respectively. Note that exports to India rose again for the second month running, improving 27% to 0.44m MT on better demand over the festive season as well as weak domestic edible oils production.

 

Heading towards peak production. Jun-15 production at 1.76m MT exceeded previous June production record. Note that Apr-15 and May-15 productions have also exceeded previous monthly highs. We think that production is likely to continue trending upwards an early peak in Aug/Sep this year, similar to last year’s trend. Thus, in line with previous early-peak production trends, we think Jul-15 production is likely to increase 6% to 1.90m MT.

 

Unexciting exports in Jul-15… We expect Jun-15 exports to edge slightly lower to 1.68m MT (-1%), in line with historical export trends. We anticipate exports to be flattish as buyers are likely well stocked up ahead of Ramadan festivities. However, the weak ringgit (c.USDMYR3.80) and relatively high soybean oil (SBO) to CPO premium (c.USD133/MT) should sustain short-term buying interest for now.

 

… but Indonesian levy could be an export catalyst.

As we mentioned in our earlier reports, we expect the implementation of a USD50/MT levy on CPO in Indonesia to reduce the share of CPO exports from Indonesia. The latest timeline for implementation is 15-Jul, but given the multiple delays so far, we exclude the levy from our Malaysian demand forecast. Should the levy be collected as per currently scheduled, we think Malaysian exports could ramp up in the latter half of Jul-15 to close 1-2% above Jun-15 exports (1.71m-1.72m MT). This implies a c.53-54% share of Malaysia and Indonesia total palm exports, higher than the 2-year historical average of 47%.

 

Jul-15 inventory to inch up 1% to 2.18m MT. We forecast Jul-15 supply at 1.96m MT to be slightly above demand of 1.94m MT. For supply, we expect production to rise 6% to 1.87m MT, in line with historical early-peak trends. Demand-wise, we believe exports will edge down 1% to 1.68m MT, unless the Indonesian levy is finally confirmed. Overall, we estimate Jul-15 inventory to close at 2.18m MT (+1%), although we may revise this figure lower to c.2.13m MT (-1%) if the Indonesian palm levy is implemented mid-Jul.

 

Maintain NEUTRAL, CPO to trade range-bound for now. As expected, CPO prices reversed to RM2,172/MT as of 9-Jul as ample edible oils supply muted traders’ optimism on El Nino. Looking ahead, we think short-term CPO prices are likely to continue trading range-bound between RM2,000/MT to RM2,400/MT as strengthening demand clashes with high production. In the mid-term, we think CPO prices could start to recover from mid-4Q15 as production eases off seasonally. Hence, we reiterate our NEUTRAL call on the sector, with no change to our FY15-16E CPO forecast of RM2,220/MT and RM2,400/MT respectively.