August 2019 CPO Inventory Eased 5.3% to 2.25m MT, Within Consensus’ Estimate of 2.22m MT, But Missed Our Forecast of 2.42m MT on Higher-than-expected Exports of 1.73m MT (vs. Our 1.57m MT Estimate) Due to Higher Demand From China (+237.4% MoM), Which We Believe Was Due to Festivity and Its Suspension on Puchases of US Agricultural Products, as Well as India (+22.6% MoM), as Local Consumption Remains Strong. For September, We Believe Production Will Rise 8.9% MoM to 1.98m MT as Production Picks Up, Leading Up to Peak Production Period in Oct/Nov 2019, While Exports Should Fall 8.2% MoM to 1.59m MT After India Increased Import Tariff by 5% (from 45% to 50%) on Malaysian Refined Palm Oil. All-in, We Expect Supply of 2.03m MT to Outstrip Demand of 1.88m MT, Leading to Higher Ending Stocks of 2.40m MT in September 2019. - CY19 CPO Price Forecast of RM2,000/MT.

August 2019 CPO inventory eased 5.3% to 2.25m MT, within consensus’ estimate of 2.22m MT, but missed our forecast of 2.42m MT on higher-than-expected exports of 1.73m MT (vs. our 1.57m MT estimate) due to higher demand from China (+237.4% MoM), which we believe was due to festivity and its suspension on puchases of US agricultural products, as well as India (+22.6% MoM), as local consumption remains strong. For September, we believe production will rise 8.9% MoM to 1.98m MT as production picks up, leading up to peak production period in Oct/Nov 2019, while exports should fall 8.2% MoM to 1.59m MT after India increased import tariff by 5% (from 45% to 50%) on Malaysian refined palm oil. All-in, we expect supply of 2.03m MT to outstrip demand of 1.88m MT, leading to higher ending stocks of 2.40m MT in September 2019. Maintain UNDERWEIGHT on the plantation sector as we expect burgeoning stockpiles to exert pressure on CPO prices. No changes to our

CY19 CPO price forecast of RM2,000/MT. However, we will closely watch production and exports to China and India in the coming months. Should there be signs of lower-than-expected production or continued higher-than expected exports to China and softer-than-expected impact of India’s import tariff increase on export volume, we would review the call and TP of planters under our coverage.

August 2019 CPO inventory eased 5.3% MoM to 2.25m metric tons (MT), in-line with the consensus estimate of 2.22m MT (-6.6% MoM), but missed our forecast of 2.42m (+1.3% MoM) mainly attributable to higher-than-expected exports of 1.73m MT (+16.4% MoM) vs. our forecast of 1.57m MT (+6.0% MoM). The growth in exports stemmed largely from: (i) China (+237.4% MoM to 308k MT), which we believe was due to the upcoming autumn festival as well as China’s suspension on puchases of US agricultural products, and (ii) India (+22.6% MoM to 566k MT), as local consumption remains strong, evidenced by the quick drawdown of palm oil inventory from 820k MT in February 2019 to 587k MT in July 2019. Meanwhile, CPO production of 1.82m MT (+4.6% MoM) was well within our forecast of 1.83m MT (+5.1% MoM) and consensus estimate of 1.78m MT (+2.1% MoM).

September 2019 production to grow by 8.9% MoM to 1.98m MT. From our channel checks with planters, due to a change in cropping patterns from the effects of El Nino and La Nina, most of them are expecting production to pick up further and peak in October-November. Consequently, we believe a pick-up in production in the coming months is on track and we forecast September’s output to increase by 8.9% MoM to 1.98m MT.

Exports to fall 8.2% MoM to 1.59m MT in September 2019. We expect to see an 8.2% MoM decline in export volume to 1.59m MT, mainly attributed to decline in exports to India after its 5% increase in import tariff (from 45% to 50%) on Malaysian refined palm oil. However, we believe the impact may not be felt in full for September as some shipments have already been loaded onto the cargo ship and are in transit. Decline in exports to India should also be partially offset by demand from China following its suspension on puchases of US agricultural products. Additionally, based on cargo surveryor’s (Intertek) data for 1st – 10th September, exports have seen a 15% decline MoM, corroborating our view.

September 2019 stocks to rise by 6.7% MoM to 2.40m MT. We expect supply of 2.03m MT to outstrip demand of 1.88m MT, leading to higher ending stocks of 2.40m MT in September 2019. To date, CPO price has recovered to RM2,105/MT (as at 6 September 2019) from a low of RM1,864/MT in early July, due to higher-than-expected exports to India and China. Nevertheless, moving forward, we expect India’s 5% increase in import tariff to result in declining exports to India in the next few months. Additionally, with production likely to pick up and peak in Oct/Nov 2019, we believe stockpiles could rise in the coming months, capping further upside to CPO prices. All-in, we believe CPO price will continue to remain range-bound (RM1,900- RM2,200/MT) in the remaining 2H19.

Maintain UNDERWEIGHT on the plantation sector. Increasing production leading up to peak production period in Oct/Nov 2019 and lower exports to India after the import tariff increase are likely to lead to burgeoning stockpiles in the coming months, exerting pressure on CPO prices. As such, we are maintaining our CY19 CPO price forecast of RM2,000/MT and UNDERWEIGHT stance on the sector. However, we will closely watch production and exports to China and India in the coming months. Should there be signs of lower-than-expected production or continued higher-than-expected exports to China and softer-than-expected impact of India’s 5% increase on import tariff to export volume, we would review the call and TP of planters under our coverage.

Source: Kenanga Research - 11 Sept 2019