Overview of MPOB June 2022 Update:

As expected, June production improved MoM but softer exports resulted in the highest closing inventory, YTD. However, it is noteworthy that June 2022 closing inventory is well below the 10-year average level, suggesting that whilst supply may be improving, the overall supply situation remains fragile and far from secure. Similarly, average CPO price for June may have eased 11% MoM to RM6,106 per MT but this is still 59% higher than a year ago. Moving forward, we expect CPO prices to ease on improving 2H 2022 supply but staying elevated as current global edible oils tightness will probably continue into 2023 as demand recovers. As such, robust margins on CPO prices of RM4,500 per MT for 2022 and RM4,000 per MT for 2023 are expected. Coupled with defensive asset-rich balance sheets and undemanding valuations, we maintain OVERWEIGHT.

Review: The Malaysian palm oil industry ended the month of June 2022 with 1.655 m MT (+9% MoM, +3% YoY) in inventory which came in 1% above Kenanga’s estimate but 3% below consensus expectation. Though such level is not excessive by historically measure – 10-year average June inventory is 1.856m MT - it is the highest YTD due to stronger MoM production of 1.545 m MT (+6% MoM, -4% YoY) on seasonal uptrend but possibly from some catching up in harvesting after the Hari Raya festivity break in May as well. Compounding the rise in June inventory was weaker exports of 1.194m MT (-12% MoM, -16% YoY) in June as Indonesia lifted its 3-week long exports ban on 23 May. Notably disappointing were the exports to China, which though higher MoM, June 2022 exports to China still came in just about half the amount exported a year ago. However, thanks to stronger overall exports in 1QCY22, cumulative Jan-June 2022 exports of 7.197m MT was slightly (+2% YoY) better than a year ago.

The average CPO price for June 2022 was RM6,106 per MT (-11% MoM, +59% YoY), weaker than May’s average following a sharp correction in price from around mid June. Nevertheless, the April – June or 2Q CY22 average price of RM6,552 per MT (+8% QoQ, +56% YoY) still came in as the highest quarterly average price to date. The YTD or 1HCY22 average CPO was RM6,302 per MT, 56% higher than a year ago and 32% better on HoH basis. Overall, 2QCY22 enjoyed excellent prices but downward pressures have started pushing prices from mid-June onwards. So, we expect softer 3Q prices trend due to seasonally higher supply ahead.

Source: Kenanga Research - 13 Jul 2022