Malaysia’s December palm oil inventory fell 11.6% MoM to 2.013m tonnes as production weakened to its lowest level since Feb 2014.Maintain NETURAL. Heavy flooding was the main culprit of the sharp production decline. Inventory level will likely continue to fall in the next 3-4 months as the seasonal downcycle progresses. While falling inventory should drive palm oil price higher, upside is limited by the weak oil price.
Production down sharply. Malaysia’s production fell by 22.0% MoM to 1.365m tonnes in December, with West Malaysia’s production plunging by 30.1% while Sabah and Sarawak both fell by 14%. The unusually sharp West Malaysia decline was caused by heavy flooding. We believe the extreme dryness in 1Q14 may have played a ro le and the impact will likely become more evident in the coming two months. For the full year, Malaysia’s production totalled 19.669m tonnes (+2.4% YoY).
Exports remain steady. Exports rose by 0.4% MoM to 1.520m tonnes, bringing the full-year number to 17.264m tonnes (-4.7% YoY). There was a steep increase in December shipments to India (+27.5% MoM) ahead of the increase in import tax, while exports to Europe rose by 16.7% MoM. In 2014, India and China swapped places as Malaysia’s biggest palm oil customer. India’s 2014 purchase jumped 38.9% to 3.230m tonnes while exports to China fell by 23.3% to 2.839m tonnes.
Weak oil price limits upside. In 2014, Malaysia rolled out its mandatory biodiesel programme nationwide, resulting in local consumption surging by 25.1% to 2.864m tonnes, soaking up 14.6% of production. With biodiesel margin now in deep negative territory, we believe biodiesel demand will fall, limiting upside to palm oil price. Nevertheless, in the immediate term, falling supply should outweigh the potential demand weakness. We believe as long as inventory continues to fall, palm oil price could inch up further.
Maintain NEUTRAL. We maintain our NEUTRAL call on the sector. Although near-term upside for palm oil price appears to be on the cards, our average price assumption of MYR2,500/tonne could be slightly optimistic and may be subject to a downward revision.
Source: RHB
Created by kiasutrader | Jun 14, 2016
Created by kiasutrader | May 05, 2016