Malaysia’s  palm  oil  stockpile  plunged  to  1.77m  tonnes  as  local  usage surged  past  300,000  tonnes  in  January  on  implementation  of  the  B7 biodiesel nationwide. Maintain NEUTRAL. This, and the  production drop more than outweighed  the slowdown in export.  The  sector outlook has brightened  somewhat  with  the  introduction  of  IDR4,000/litre  biodiesel subsidy in Indonesia, which yields a margin of USD22/bbl to producers. Inventory  plunge.  Malaysia’s  stockpile  fell  by  12.2%  MoM  to  1.77m tonnes in January despite  a slowdown in export as a result of  a 15.0% MoM  fall  in  production  and  an  increase  in  local  usage  due  to  the implementation of the B7 biodiesel program nationwide.

No  more  flood.  The  decline  of  production  in  January  followed December’s 22.0%  decline.  While the  decline in December was due to heavy floods, January production’s extreme weakness (-23.1% YoY) was likely due to the 12-month impact of  drought in 1Q last year. It is likely that the production weakness will continue to be felt in February. Export  weakness.  Export  dipped  by  22.1%  MoM  and  13.4%  YoY.  In absolute  terms,  the  MoM  decline  of  335,300  tonnes  exceeded  the 204,200  tonnes  decline  in  production.  Weaker  exports  were  seen  to China  (-41,100  tonnes),  Bangladesh  (-34,200  tonnes),  India  (-209,800tonnes) and Europe (-69,700  tonnes). The sharp decline in shipment to India was likely due to overbuying in December.

B7  boost.  Malaysia’s  January  local  consumption  surged  to  311,800 tonnes, compared with  an average monthly usage of 238,400  tonnes in 2014  and  190,700  tonnes  in  2013.  The  increase  was  likely  due  to  thenationwide  implementation of  the  B7 biodiesel program. In comparison, only West Malaysia  had  its  mandatory  biodiesel  rollout  last  year  and  it was a B5 blend instead of B7.

More optimistic outlook. The rollout of Malaysia’s B7 biodiesel program plus Indonesia’s IDR4,000/litre  biodiesel subsidy has helped  to shake off somewhat the effects of low crude oil prices, which we believe have been the main factor weighing on palm oil. The tightening stockpile should help palm oil prices strengthen. We continue to like Bumitama (BAL SP, BUY, TP  SGD1.48),  Astra  Agro  Lestari  (AALI  IJ,  BUY,  TP  IDR30,003)  and Genting Plantations (GENP MK, BUY, TP MYR11.60).

Source: RHB