• Top Picks: Kuala Lumpur Kepong (KLK), IOI Corp and Wilmar International. With the unresolved labour shortage and Indonesia’s levy- free policy extended to end-2022, Malaysian stock levels may stay high until at least year-end, thereby restraining CPO prices. Still, geopolitical risks in the form of a potential non-renewal of the Ukrainian grains corridor agreement could jeapordise global oilseed supply further. Stay NEUTRAL.

• Malaysia’s palm oil output rose by a slight 2.4% MoM in October, while inventory rose to 2.40m tonnes (+3.7% MoM) despite exports rising 5.7%. Although there has been a trickle of foreign workers coming into the country, it is not enough to alleviate the significant labour shortages (Figure 19), thus affecting output. Exports will also continue to be affected by Indonesia’s tax- free holiday – although there could be a seasonal pick-up for the upcoming Lunar New Year period. All in, we expect palm oil (PO) stock levels to remain above 2m tonnes until year-end.

• Recent developments:

  i. Extension of levy-free holiday in Indonesia to year-end provided CPO reference price does not cross USD800/tonne. Given the recent price increase, we may see the tax levy being reapplied sooner-than-expected, which should be positive for Malaysian PO exports;
  
  ii. Russia resumed participating in the grains corridor initiative after a 4-day suspension, paving the way for the continued exports of Ukrainian oilseeds. However, the deal expires on 19 Nov and Russia has not committed to renewing the deal unless it is able to ensure export of its own huge fertiliser output. Should this not be renewed, we would be in for another supply shock situation;
  
  iii. With the recent rise in soybean oil (SBO) and CPO prices, the discount between the two has widened again to c.USD805/tonne – significantly above the historical average of USD100-150 per tonne – at new record highs. Demand should continue to improve as a result, as can be seen by China’s PO imports which are now down by 42% YTDSeptember (from -52% in YTD-August), while India’s PO imports in YTDSeptember are down 4% (from -11% in YTD-July);
  
  iv. Stock levels in China back to normal but India fell back. China has been restocking from Malaysia, buying 36% more palm products MoM in October – resulting in its stock levels rising to 6% above historical levels (vs -19% in September). India started buying more from Malaysia again, evidenced by the 13% MoM rise in imports from Malaysia. Still, it may have reduced buying from Indonesia, as its PO stock levels fell back to 14.5% below historical levels in October (from 5% below in September);
  
  v. Due to the rise in CPO prices, the palm oil and gasoil or POGO spread has narrowed to USD4.75/bbl. This bears watching, as it would determine if discretionary biodiesel demand of 2.5-3m tonnes comes back into the equation

• Maintain NEUTRAL on sector with no change to our MYR5,100/tonne and MYR3,900/tonne CPO ASP assumptions for 2022 and 2023, for now. We maintain our Top Picks of integrated players, ie KLK, IOI and Wilmar.

Source: RHB Research - 11 Nov 2022