Review of September figures:

September inventory of 1.75m MT (-7.0% MoM) came below both our/consensus’ estimates. The deviation was mainly due to lower-than-expected production, likely due to trees taking a breather. Exports rose (+36.8% MoM) mainly due to: (i) China (+70% MoM), (ii) India (+23% MoM), and (iii) EU (+26% MoM).

Our projection for October:

For October, we forecast: (i) production to continue its uptrend (+4.2% MoM) with peak in Oct-Nov, and (ii) exports to moderate (-6.2% MoM). While we expect continued strength from China, demand from countries in the Middle East and Africa could moderate. India’s recent edible oils stock limit should also be a drag. Data from cargo surveyors for 1st – 10th Oct have shown an average 10% MoM decline. All in, we expect total supply to outstrip total demand, leading to higher inventory of 1.80m MT (+3.1% MoM).

Our thoughts on the sector:

September MPOB data is bullish for CPO prices, but could be eclipsed by signs of weaker demand ahead (cargo surveyor data & India’s recent edible oils stock limit). Moving forward, the prevailing key factors remain: (i) speed of foreign workers intake to address labour situation, (ii) production strength, (iii) Chinese and Indian demand, (iv) ESG developments, and (v) supply-demand dynamics of other edible oils.StayNEUTRALon the plantation sectorwith an unchanged CY21 CPO price forecast of RM3,700/MT. Our integrated pick with defensive overall margin against CPO price variability is KLK (OP;TP: RM23.60).

September 2021 CPO inventory fell (-7.0% MoM) to c.1.75m metric tons (MT). This is below both our/consensus’ estimates of 1.92m/1.87m MT (+2.0%/-0.5% MoM), respectively. The deviation is mainly from lower-than-expected production of 1.70m MT (-0.4% MoM) vs. our/consensus’ +5.2%/2.3% MoM expectation, likely due to trees taking a breather. As expected, exports rose (+36.8% MoM) mainly due to: (i) China (+70% MoM), (ii) India (+23% MoM), and (iii) EU (+26% MoM).

Forecasting October 2021 production to rise further (+4.2% MoM) to 1.78m MT with growth likely from Peninsular and Sabah. We now expect production to peak in Oct-Nov, in line with majority of planters’ views.

Exports to moderate (-6.2% MoM) to 1.50m MT in October 2021. While we expect continued strength from China, we think demand from countries in the Middle East and Africa could moderate. India’s recent edible oils stock limit (until March 2022) will likely result in reduction of Malaysia and Indonesia’s palm oil exports to the country. Data from cargo surveyors for 1st – 10th October showed an average decrease of 10% MoM.

October 2021 inventory to resume uptrend (+3.1% MoM) to 1.80m MT as total supply of ~1.85m MT outstrips total demand of ~1.80m MT. The key factors to continue focusing on in the coming months are: (i) speed of foreign workers intake to address labour situation, (ii) production strength, (iii) Chinese and Indian demand, (iv) ESG developments, and (v) supply-demand dynamics of other edible oils.

Stay NEUTRAL on the plantation sector with CY21 CPO price forecast of RM3,700/MT. The September MPOB data is bullish for CPO prices. However, it could be eclipsed by signs of weaker demand (cargo surveyor data & India’s recent edible oils stock limit). Our integrated pick with defensive overall margin against CPO price variability is KLK (OP; TP: RM23.60).

Source: Kenanga Research - 12 Oct 2021