September 2019 inventory rose 9.3% MoM to 2.45m MT, slightly below consensus estimate of 2.52m MT, but marginally above our forecast of 2.39m MT due to lower-than-expected exports to India (-45.1% MoM) from the impact of its 5% increase in import tariff on Malaysian refined palm oil, and (ii) China (-27.9% MoM) due to normalization after August’s buying frenzy ahead of the autumn festival. September’s CPO production of 1.84m MT (+1.1%) was below both consensus and our forecasts of 1.91m MT (+4.7% MoM) and 1.98m MT (+8.9% MoM), respectively, mainly due to the haze which affected photosynthesis. For October, we expect production to register 3.7% MoM growth with the clearing of the haze by late-September, while exports are expected to decline further by 5.1% MoM to 1.34m MT as the full impact of India’s import tariff hike is felt. Based on cargo surveryors’ (AmSpec & Intertek) data for 1st – 10th October, exports have seen an average 13% decline MoM, corroborating our view. All-in, we expect supply of 1.97m MT to outstrip demand of 1.64m MT, leading to higher ending stocks of 2.78m MT in October 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. Nevertheless, we will closely watch: (i) the extent of pick up in production, (ii) exports to China and India, and (iii) rainfall in Malaysia and Indonesia and the potential impact on production, if any. Should there be signs leading to falling stockpiles and a recovery of CPO prices, we would review the call and TP of planters under our coverage.

September 2019 CPO inventory rose 9.3% MoM to 2.45m metric tons (MT), slightly below consensus estimate of 2.52m MT (+12.5% MoM), but marginally above our forecast of 2.39m MT (+6.7% MoM), largely attributed to lower-than-expected exports of 1.41m MT (-18.8% MoM) vs. our forecast of 1.59m MT (-8.1% MoM). This mainly came from decline in exports to: India (-45.1% MoM to 311k MT) which was due to its 5% increase in import tariff effected on 4-Sep-2019 (from 45% to 50%) on Malaysian refined palm oil, and (ii) China (-27.9% MoM), which we believe is a normalization after August’s buying frenzy ahead of the autumn festival. Meanwhile, CPO production of 1.84m MT (+1.1%) was below both consensus and our forecasts of 1.91m MT (+4.7% MoM) and 1.98m MT (+8.9% MoM), respectively, mainly due to the haze in September, as it reduces the amount of sunlight to the trees and thus, affected photosynthesis.

October 2019 production to grow 3.7% MoM to reach 1.91m MT. Despite the haze in September limiting the amount of sunlight to the trees, affecting photosynthesis, production managed to register MoM growth of 1.1%. With the clearing of the haze by late-September, we believe production should pick up and is on track to peak in October-November. From our channel checks with a few planters, this is also in line with their expectations. Therefore, we forecast October output to increase 3.7% MoM to 1.91m MT.

Exports to decline further by 5.1% MoM to 1.34m MT in October 2019. Moving forward, we expect to see a 5.1% MoM decline in export volume to 1.34m MT, mainly attributed to further decline in exports to India. We believe the impact of India’s import tariff increase was not fully felt in September as some shipments were already loaded onto cargo ships and were in transit prior to the tariff hike. Based on cargo surveryors’ (AmSpec & Intertek) data for 1st – 10th October, exports have seen an average 13% decline MoM, corroborating our view.

October 2019 inventory expected to rise 13.4% MoM to 2.78m MT. We expect supply of 1.97m MT to outstrip demand of 1.64m MT leading to higher ending stocks of 2.78m MT (+13.4% MoM) in October. On CPO price, further exports decline and rising production is expected to continue to exert pressure on CPO prices. Additionally, a narrower CPO-to-gasoil discount of c.USD82 (vs. 1-year average of c.USD123) is unlikely to encourage additional discretionary blending of biodiesel. All-in, we believe CPO price will continue to remain range-bound (RM1,900-RM2,200/MT) in the remaining 4Q19.

Maintain UNDERWEIGHT on the plantation sector. Increasing production leading up to peak production period in Oct/Nov 2019 and lower exports mainly to India 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, in the next few months, we will closely watch: (i) the extent of pick up in production, (ii) exports to China and India, and (iii) rainfall in Malaysia and Indonesia and the potential impact on production, if any. Should there be signs leading to falling stockpiles and a sharp recovery of CPO prices, we would review the call and TP of planters under our coverage.

Source: Kenanga Research - 11 Oct 2019