• Top Picks: Ta Ann (TAH), Sarawak Oil Palms (SOP), Golden Agri (GGR), and PP London Sumatra Indonesia (LSIP). Malaysia’s January palm oil (PO) stocks dipped 12% MoM to 2.02m tonnes, as output and exports fell 10% and 1%. Lower production in the months ahead together with an anticipated stronger demand in the export market could potentially lead to Malaysian PO stocks dropping below the 2m tonne mark by next month, thus providing a boost to CPO prices. Maintain sector NEUTRAL.

• Latest developments:

i. El Nino peaked, next is La Nina? International climate model forecasts indicate that the El Nino has peaked and is now declining, with expectations of a return to neutral levels by May. However, by Jul-Sep 2024, La Niña becomes the most probable category, with a likelihood of 58%. As the last “triple-dip” years of La Nina in 2020-2023 were moderate events, there is a chance that 2024’s La Nina could be strong. While the impact of La Nina on palm production is not normally significant, we saw the last three back-toback years of La Nina having an impact, ranging from extreme rainfall and flooding in Australia, prolonged droughts in Africa, and the exceptional drought in southwestern US. We would therefore need to monitor the severity of this La Nina and its impact on other crops;

ii. India has allowed an extension of the lowered import duty on edible oils to Mar 2025 (initially due to expire in Mar 2024) in order to address inflationary pressures. This should bode well for demand from India, although price competition will continue to play a part in determining the country’s buying pattern. With CPO currently priced at a USD4.22/tonne premium to sunflower oil and at a narrowing discount to soybean oil (SBO), we believe demand from India has shifted;

iii. B35 mandate in Indonesia should see 14% YoY rise in CPO usage in 2024. Indonesia ended the year with only a 2.5% YoY rise in biodiesel production based on B35 mandate, short of the 15% YoY rise target. This means that demand in 2024 should rise by another 14% in order to hit the full year B35 mandate. This will take up an additional 1-1.5m tonnes of CPO.

• Malaysia’s January PO stocks fell to 2.02m tonnes (-12% MoM) as output and exports fell 10% and 1% MoM. The stock-to-usage (S/U) ratio is now at 10.3%, slightly above the 15-year historical average of 10%. Although production is set to taper off in the coming months, export market demand may make a comeback in anticipation of the Aidil Fitri festivities and restocking activities as stock levels should run down further. As such, we believe PO stocks could drop below the 2m tonne mark by next month, thus providing support to CPO prices.

• Maintain sector NEUTRAL with a tactically positive trading strategy, as we continue to expect a higher CPO price environment in 1H24, in anticipation of a seasonally weaker output and the El Nino impact. We continue to prefer upstream players, with Top Picks being TAH and SOP in Malaysia, GGR in Singapore, and LSIP in Indonesia.

Source: RHB Securities Research - 14 Feb 2024