Malaysian July palm oil production came in 6% below Kenanga’s estimate but exports were 9% higher in spite of intense competition from Indonesia. Not surprisingly, Malaysia’s July inventory ended 6% lower than anticipated but still firmer by 7% MoM and 18% YoY at 1.733m MT. Exports was spurred by CPO prices which corrected from early June till July on aggressive Indonesian selling. However, physical and forward prices have started consolidating around RM4,000/MT levels of late, hence we are keeping our average target price for 2022 CPO at RM4,500/MT and RM4,000/MT for 2023. Moreover, improving edible oils supply is fragile while demand recovery should pick up in 2023. Although CPO prices have likely peaked, earnings and cash flows are resilient. Profit margin and balance sheet are robust. Sector ratings are undemanding and CPO price softness has been largely priced in by the equity market. Altogether, maintain OVERWEIGHT given the sector’s defensiveness amidst unclear economic outlook.

Review: With peak fruiting season approaching, stronger MoM production can be expected; hence, the July production uptick to 1.574m MT (+2% MoM, +3% YoY) is not surprising. As we actually had expected higher July output, the concern here is whether this might portent Malaysia’s production challenge due to ongoing labour constraints.

Having banned exports for almost a month (28 Apr – 23 May), the lack of storage became an issue in Indonesia. So, since June, it has been trying to boost exports and local usage. Acceleration of exportspermits were announced late May, then export levy was cut on 8 June followed by the removal of exports levy altogether from mid-July. As such, stronger-than-expected July exports of 1.322m MT (+11% MoM, 6% YoY) for Malaysia is surprising, reflecting ready demand once prices reach more attractive levels. Exports to India and Turkiye (Turkey) picked up MoM but China remained disappointingly at the sideline, importing only 55,325 MT (-43% MoM, -67% YoY) from Malaysia in July. End-July inventory levels in India and China were estimated to be >50% and 20-30% below July 2021, respectively. With Deepavali due on 24 Oct, we reckon exports to India will continue to stay buoyant in August and possibly till September.

Although July inventory may have edged up MoM and YoY to 1.773m MT, it still came in 6% below our expectation of 1.876m MT and also below the 5-year average for July, an indication perhaps that while supply is trending up, the overall supply-demand scenario remains tight. Moving forward, demand for palm oil should stay healthy as palm oil prices is now among the most competitive compared to other edible oils while the inventory levels among traditional palm oil buyers such India and China can do with replenishment. Average CPO price in July was RM4,063/MT (-33% MoM, -2% YoY).

Source: Kenanga Research - 11 Aug 2022