• Top Picks: Wilmar, Kuala Lumpur Kepong (KLK), Sarawak Oil Palms (SOP), Ta Ann (TAH), and PP London Sumatra (LSIP). Malaysia’s CPO output fell 9.3% MoM in February, while stocks dropped 2.1% to 1.52m tonnes. We believe a trading strategy is best for the sector right now, in light of the volatility in CPO prices and the many uncertainties ahead. We maintain our NEUTRAL sector rating.

• February production dropped MoM (-9.3%), but rose 2.6% YoY. The MoM decline came from Sabah (-18.7%), Sarawak (-16.9%) and West Malaysia (-1.0%) while the YoY increases were from Sabah (+20.2%) and West Malaysia (+1.2%), offset by Sarawak (-10.0%). Indonesia saw a 9.7% YoY output growth in 2021.

• Exports fell by 5.2% MoM while YoY exports rose 22.4% YoY. The major MoM drops came from India (-18.3%), Bangladesh (-9.4%), and the EU (-8.2%), offset by China (+17.2%) and Pakistan (+72.4%).

• Inventory levels dropped slightly to 1.52m (-2.1% MoM) in February. The annualised stock/usage ratio dropped to 7.9% (from 8.1% last month), which is below the 15-year historical average of 10%. Coupled with labour shortage issues, we expect stock levels to remain low in 1Q22, due to the low-output season.

• Latest developments:

  i. China’s palm oil (PO) stocks fell in February (-9.5% MoM, -50% YoY), despite higher Malaysian imports. Stocks are now 42% below historical averages. China’s soybean oil (SBO) stocks have, however, improved MoM (8.0%) but dropped 4% YoY, at 34% below historical levels.

  ii. India’s stock levels dropped last month (-15.7% MoM, +5.8% YoY), reflecting lower Malaysian exports (-18.3% MoM) and are now 44% below the historical average. Imports of edible oils rose by 16.5% YoY in Jan 2022, while palm oil imports dropped by 30%, indicating switching to other oils – given the high CPO prices. We may continue to see more switching if CPO continues to trade at unfathomable levels.

  iii. Both Pakistan’s and Bangladesh’s palm oil stocks are currently 31- 33% below their 3-year historical averages. This is likely due to demand rationing, given their sensitivity to prices.

  iv. With the Russia-Ukraine war still ongoing, agricultural prices remain volatile. Both soybean oil (SBO) and CPO prices have risen by c.50-60% in the last few months. CPO is now trading at a premium to SBO of USD70.00/tonne (from USD80.00/tonne discount last month), making CPO uncompetitive. Should the war continue for much longer, the sunflower seed planting season (April to September) in Russia and Ukraine will be disrupted, while other crops could be damaged – resulting in 6-7% of global oilseed crop being lost. Besides this, Russia is one of the largest producers of potash fertiliser globally, and this could lead to higher prices and supply shortages.

• We maintain our NEUTRAL sector rating and continue to prefer purer Malaysian players as well as those with downstream capacities in Indonesia, who will be able to benefit from the current regulatory structure.

Source: RHB Research - 11 Mar 2022