Review of October figures:

October inventory of 1.83m MT (+4.4% MoM) came within both our/consensus’ estimates. Production inched higher (+1.3% MoM) vs. our forecast (+4.2% MoM). Exports fell (-12.0% MoM) mainly led by India (-17% MoM) and African countries: (i) Mozambique (-80% MoM), (ii) Madagascar (-99% MoM), (iii) Cote D’Ivoire (-99% MoM), and (iv) Djibouti (-59% MoM). This is likely due to post-Deepavali demand ease.

Our projection for November:

For November, we forecast: (i) production to decline (-3.8% MoM), and (ii) exports to rise (+5.8% MoM). While colder weather, India’s edible oils stock limit and soybean oil’s duty advantage in India should affect palm oil exports, we expect exports to countries like EU and U.S.A to pick up ahead of Christmas and New Year celebrations, making up for the losses. Data from cargo surveyors for 1st – 10th November have shown an average 8% MoM increase. All in, we expect total demand to outstrip total supply, leading to lower inventory of 1.78m MT (-2.9% MoM).

Our thoughts on the sector:

October MPOB data is a dampener for CPO prices, but market participants will likely focus on the signs of weakness in November’s production (less fruit bunches and higher rainfall). The prevailing key factors remain: (i) speed of foreign workers intake to address labour situation, (ii) Chinese and Indian demand, (iii) ESG developments, and (iv) supply-demand dynamics of other edible oils. Stay NEUTRAL on the plantation sector. Our integrated pick with defensive overall margin is KLK (OP; TP: RM23.60).

October 2021 CPO inventory rose (+4.4% MoM) to c.1.83m metric tons (MT). This is within both our/consensus’ estimates 1.80m/1.81m MT (+3.1%/+3.4% MoM), respectively. Production inched higher (+1.3% MoM) to c.1.73m MT against our 1.78m MT (+4.2% MoM). Exports fell (-12.0% MoM) mainly led by India (-17% MoM) and African countries such as: (i) Mozambique (-80% MoM), (ii) Madagascar (-99% MoM), (iii) Cote D’Ivoire (- 99% MoM), and (iv) Djibouti (-59% MoM). We believe this is due to easing demand after festivities (Deepavali).

Forecasting November 2021 production to decline (-3.8% MoM) to 1.66m MT as we think production could have already peaked. There are signs of weakness in November’s production with some planters observing less fruit bunches and higher rainfall. Strengthening our view is the fact that both Sarawak and Sabah’s production have been on an uptrend for three consecutive months (trees typically take a breather after three consecutive monthly increases).

Exports to rise (+5.8% MoM) to 1.50m MT in November 2021. Exports to India should remain subdued due to its recent edible oils stock limit as well as soybean oil’s duty advantage. Colder weather should also encourage the shift towards soyoil which will affect exports. That said, we think exports to other countries like EU and U.S.A could pick up ahead of Christmas and New Year celebrations leading us to believe exports for November should increase by 5.8% MoM. Data from cargo surveyors for 1st – 10th November has shown an average increase of 8% MoM.

November 2021 inventory to decline (-2.9% MoM) to 1.78m MT as total demand of ~1.79m MT outstrips total supply of ~1.74m MT. The key factors to continue focusing on in the coming months are: (i) speed of foreign workers intake to address labour situation, (ii) Chinese and Indian demand, (iii) ESG developments, and (iv) supply-demand dynamics of other edible oils.

Stay NEUTRAL on the plantation sector. The October MPOB data is a dampener for CPO prices, but market participants will likely focus on the signs of weakness in November’s production. Our integrated pick with defensive overall margin against CPO price variability is KLK (OP; TP: RM23.60).

Source: Kenanga Research - 11 Nov 2021