Slight Improvement in Stockpiles

November 2016 palm oil stockpiles came in below market expectations mainly due to lowerthan-expected production and higher-than-expected exports. Note that the palm oil stockpiles increased to 1.66mn tonnes (+5.2% MoM, -43.1% YoY) which is the highest level in 4 months. Based on Bloomberg’s estimates, the market was expecting stockpiles to increase by 8.3% to 1.70mn tonnes. Palm oil exports came in above market estimates at 1.37mn tonnes (-4.2% MoM, -8.6% YoY). Domestic consumption stood at 186k tonnes (-24.1% MoM, -7.9% YoY) which was below market estimates of between 210k – 250k tonnes for November.

Total Exports Continue to Decline

Even though total exports declined for the third consecutive month, exports increased MoM across China (+16.3%), the US (+17.7%) and Pakistan (+2.2%), which partially offset the decline in exports to India (-35.6%) and the EU (-28.2%). Looking forward, Intertek estimates that palm oil exports for the first 10 days of December to reduce by 8.3% to 326k tonnes. According to another cargo surveyor, Societe Generale de Surveillance (SGS Malaysia), palm oil exports are expected to fall 12% to 306k tonnes within the same period.

Weak FFB Yield Continues

As expected, FFB yield remained in a weak recovery mode, which filtered down to low CPO production. On MoM basis, FFB yield declined slightly across Malaysia (-3.9% to 1.46 tonnes/ha) – P. Malaysia (+1.3%), Sabah (-7.2%) and Sarawak (-9.2%). This has brought the total CPO production to 1.58mn tonnes (-6.1% MoM, -4.8% YoY). YoY, the decline in FFB yield has narrowed to a single-digit percentile of 7.0% for the first time in nine months.

Factors Affecting Exports

Exports to India declined mainly due to the demonetisation of 500 and 1,000 Indian Rupees which has hampered demand of palm oil as the consumers (largely the low-income group) has less cash to spend, even on commodities (i.e. palm oil). We believe the impact is short-term and may take about four to twelve months to normalise. In the case of China, the country is undergoing re-stocking activity in preparation for the Lunar New Year celebration. Furthermore, discount of palm oil to soybean has increased MoM by 8.8% which makes palm oil as the cheaper option.

Maintain Underweight

We are of the opinion that the i) lower-than-expected production growth due to lingering effects of the El Nino, ii) increasing palm oil imports, and iii) restocking activity in China will likely provide some supports to the CPO price for December 2016. However, we reiterate our Underweight recommendation for the plantation sector due to rich valuation. Maintain Sell on IOI, KLK, Sime Darby, FGV, IJMP, United Malacca, Wilmar and IFAR, due to pricey valuations.

Source: TA Research - 15 Dec 2016