Malaysian Palm Oil Board’s data for December 2020 showed crude palm oil’s (CPO) stock-to-usage ratio (S/U ratio) declined to a record low level at 6.1%, largely driven by strong exports to China and India. MQ Research thinks that supply will remain tight for at least over 6 months and expects planters to book strong earnings in 1Q21. MQ Research’s estimates and top picks are under review, though Sime Darby Plantation has the highest CPO price leverage.

Key Points

• Malaysian Palm Oil Board (MPOB) stock-to-usage ratio (S/U ratio) declined to 6.1%, a record low level
• Tightening of S/U ratio was largely driven by strong exports to China and India in 2H20
• MQ Research opines CPO price will remain more than RM3,000/mt until supply recovers in 2H21

Event

• MPOB reported the December stats with inventory level of 1.27mn mt (-37% YoY). On a monthly average basis, CY20 inventory dipped to 1.7mn mt (-32% YoY). CY20 production volume declined to 19.1mn mt (-4% YoY), meanwhile CY20 exports volume declined to 17.4mn mt (-6% YoY) largely due to the COVID-19 demand disruption in 2Q20. All in all, the MPOB S/U ratio tightened to 6.1%, the lowest MQ Research has seen to date.

Impact

• Elevated CPO price will hold at least until 1H21-end; demand already stable but supply side remains shaky. The sustained import volume from both China and India since June 2020 are strong signals that demand has stabilised after the COVID-19 disruptions. On the other hand, supply will likely remain tight, at least over the next six months due to i) labour shortage in Malaysia; ii) heavier-than-usual rain in Malaysia, which disrupts harvesting; iii) later fertiliser application in CY20 – results of higher production only to be seen nine months later. However on the flipside, factors ii and iii above are likely to boon production recovery in 2H21.

• Unlikely to see planters monetising the high CPO price in 4Q20 results due to the wait and see approach from buyers. Year-to-date (YTD) CPO price averaged at RM3,669/mt vs. CY20 average of RM2,682/mt. The sudden price spike of >RM3,000/mt began in early Nov ‘20 and has inched higher since. MQ Research understands from the planters that they were unable to capture the high CPO price in 4Q20 as buyers took the wait and see approach, hoping for prices to taper off. However, as prices constantly trended upwards and CPO inventory began to run low, buyers have started to buy CPO at higher prices starting late December. As such, MQ Research would expect CPO players to post book strong earnings only in 1Q21, due to the higher realised price.

• Based on new levy structure, at current price Indonesian CPO exporters are paying the highest levy bracket at USD180/mt. For context, the Indonesian government remains committed to keeping the B30 program to support CPO price, tipping the scale towards the domestic plasma farmers. Consequently, purchasing power recovery of the mass market would therefore be able to gain steam. Separately on domestic production, there are emerging signs of La Niña in the form of heavy rainfalls, which will likely weigh on nascent production recovery. As such, with broad-based improvement in fresh fruit branches yields still on shaky ground, price will likely remain elevated, in MQ Research’s view.

Outlook

MQ Research is reviewing its estimates and top picks – however MQ Research notes that in its coverage, Sime Darby Plantations (SIMEPLT) and London Sumatra have the highest CPO price leverage.

Source: Macquarie Research - 14 Jan 2021