• Top Picks remain a mix of pure and integrated planters – Sarawak Oil Palms (SOP), IOI Corp (IOI), and PP London Sumatra Indonesia (LSIP). PO inventory rose to 1.83m tonnes in June, due to lower exports but offset by lower production. We expect PO inventory to continuously increase, reaching the 2m tonne mark in the coming months. Main catalyst to look out for remains the La Nina – whose probability remains high, at 85% in 4Q24. Keep NEUTRAL.

• Recent developments:

i. La Nina is still a possibility – and is expected to develop in Sep-Nov 2024 and then persist through 1Q25 – with an 85% probability. The Australian Bureau of Meteorology has a “La Nina Watch” on currently – which indicates a 50% chance of the prediction coming through;

ii. Incoming Indonesian President Prabowo Subianto has signalled his intention to boost palm oil output by potentially using industrial forest land for oil palm cultivation, and keep to the biodiesel mandate by raising it from the current 35% to 40% by 2025, and 50% by 2029. We are unsure of how the conversion of industrial forest land can be done given the environmental restrictions in place and would therefore not be too optimistic on this plan at the moment. We do believe, however, that output needs to increase further before biodiesel mandates can rise to as high as 50% by 2029 given the tight supply, and the food vs fuel debate. The increase to B40 in 2025 will soak up another 1.5-2m tonnes of palm oil from the market;

iii. On the demand front, Hindustan Unilever (HUL) is reducing the palm oil content in its soaps in India by 25% as part of a wider strategy to offset volatility in commodity prices and reduce environmental impact. Palm oil will be replaced with a mix of plant-derived polysaccharides, vitamin blends and natural fatty acids, and eventually, the technology would also be introduced in other countries. With a 38% share of India’s soap market, HUL is the country’s leading soap supplier, while palm oil and its derivatives accounted for over 20% of its input costs. This will be negative for demand from India, the second largest consumer of palm oil currently. We understand only 10% of palm oil used in India is for non-food purposes. As such, based on our back-of-the-envelope calculation, a 25% reduction on all non-food usage in India would only impact demand by 0.25m tonnes. Still, should this change be instituted globally by Unilever and adopted by other multinational corps, demand could be affected more significantly.

• In Malaysia, inventory levels increased 4% MoM to 1.83m tonnes, thanks to lower exports (-13% MoM) but offset by lower production (-5% MoM). Going forward, we expect stock levels to gradually improve and approach the 2mtonne mark in the coming months as we enter the peak production season.

• Maintain NEUTRAL sector call. We make no changes to our CPO price assumption of MYR3,900/tonne for 2024. Our Top Picks are now a mix of pure and integrated planters on valuation grounds – IOI, LSIP and SOP.

Source: RHB Securities Research - 11 Jul 2024