November 2019 CPO inventory declined 4.1% MoM to 2.26m metric tons (MT), marking its second consecutive monthly decline. November stockpile levels came within our estimate of 2.23m MT (-5.1% MoM), but above consensus’ forecast of 2.15m MT (- 8.6% MoM), mainly attributed to lower-than-expected exports of 1.40m MT (-14.6% MoM) vs. consensus’ 1.56m MT (-5.2% MoM). The deviation in exports largely stemmed from: (i) normalizing demand from “Other” countries (-24% MoM) such as Bangladesh (-87% MoM), Turkey (-67% MoM), Nigeria (-46% MoM) on higher CPO prices, and (ii) lower demand from India (-35% MoM). Meanwhile, November 2019 production declined 14% MoM to 1.54m MT (steepest decline since Feb 2018), also marking its second consecutive monthly decline.

December 2019 production to decline further by 8.0% MoM to 1.41m MT. We expect to see continued impact from the dry weather (in June-early October) into December. Alongside cost management maneuvers such as lower new planting activities and lower fertiliser application in the past 1-2 years, we believe production should continue to decline. As such, we forecast December output to fall by 8.0% MoM to 1.41m MT.

Exports expected to decline to 1.34m MT (-9.8% MoM) in December 2019. Typically, palm oil buyers switch to soybean oil during winter (Dec to Feb) given palm oil’s high solidification point of c.35°C (vs. soybean oil’s -18°C to -8°C). Additionally, we expect demand from India to remain low as the country has already built up its oils and fats inventory. As of Oct 2019, India’s inventory level for oils and fats was at its highest level year-to-date at 1.27m MT (+28% YoY), while its palm oil inventory was at 755k MT (+17%; YTD second highest level). However, this should be slightly cushioned by China’s demand given the country’s low inventory level as of Oct 2019 (2.20m MT; -16% YoY). Overall, we expect exports to fall 9.8% to 1.34m MT in December. Based on cargo surveyor’s (AmSpec & Intertek) data, exports (1st – 10th Dec) have already seen a decline of 12%, corroborating our view.

December 2019 inventory to further decline to 2.19m MT (-2.8% MoM). We expect demand of 1.55m MT to outstrip supply of 1.49m MT, leading to lower ending stocks of 2.19m MT (-2.8% MoM) in December. Meanwhile, on CPO prices, weaker exports data is expected to exert pressure on CPO prices in the near term. Additionally, soybean oil-crude palm oil (SBO-CPO) premium has narrowed to merely c.USD 17/MT (vs. 3-year average of c.USD 109/MT) which should encourage more buyers to turn to palm oil’s substitute, while the current palm oil-gas oil (POGO) spread of c.USD +93/MT (vs. 1-year average of c.USD -93/MT) should negatively impact the market for discretionary biodiesel blending.

Maintain NEUTRAL on the plantation sector with an unchanged CY19-20 average CPO price forecast of RM2,100- RM2,400/MT. All-in, considering the spectacular rally CPO has seen (+51%), we believe CPO price should retrace in the near term and range between RM2,400-RM2,600/MT for the remaining 4QCY19. We maintain our call/TPs for planters under our coverage for now, pending review. Key factors to watch out for are: (i) export data from cargo surveyors, and (ii) weather conditions.

Source: Kenanga Research - 11 Dec 2019