Small Rise in Stockpiles

Malaysia Palm Oil Board (MPOB)’s July 2023 palm oil stockpile increased slightly by 0.7% MoM to 1.73mn tonnes, which was below market expectations of 1.79mn tonnes. The higher production of 1.61mn (+11.2% MoM, +2.3% YoY) was offset by higher exports (+15.5% MoM, 2.5% YoY). Imports, on the other hand, dropped by 23.2% MoM to 103.8k tonnes. Lastly, domestic usage also weakened by 8.9% MoM to 348.3k tonnes (refer to Figure 1).

Production Increased 11.2% MoM

CPO production surged 11.2% MoM to 1.61mn tonnes, which beat market estimates of 1.56 – 1.58mn tonnes. The increase was in line with the seasonal up-trend and expected to reach its peak in Oct/Nov. The easing of labour shortage could also lead to more harvesting productivity, in our view. In terms of FFB yield, P. Malaysia and Sarawak registered higher FFB yields of 1.39 tonnes/ha (+17.8% MoM) and 1.42 tonnes/ha (+18.3% MoM). Sabah, on the other hand, remained flattish at 1.28 tonnes/ha. Overall, the YTD FFB yield decreased slightly by 0.4% YoY to 8.16 tonnes/ha, mainly due to low production in 2Q.

We expect the production to grow in the 2H of the year with the ease of labour shortages. ElNino events are detrimental to production. However, it is unlikely to impact palm oil production this year since palm production typically lags a change in prevailing climate conditions by six to nine months.

Exports Rose 15.5%

Exports grew by 15.5% MoM to 1.35mn tonnes in July, marking the 2nd consecutive month of increase. YTD, total exports stood at 8.44mn tonnes (-0.7% YoY). Looking forward, cargo surveyors, Intertek and Amspec estimated that palm oil exports for the first ten days of Aug-23 would increase by 17.5% and 5.9% MoM to 384k and 395k tonnes, respectively.

The CPO Upward Trend Still Needs Time to Be Realised

YTD CPO prices have averaged at RM3,918/tonne. To recap, the CPO price increased by 6.3% and touched its four-month high at RM4,061/tonne on 25 July before dropping to RM3,732/tonne recently. The surge in price was largely due to Russia’s attack on Ukraine's main inland port across the Danube River from Romania, driving up grain prices on fears Ukraine would not be able to get crops to buyers. Subsequently, CPO prices fell by 8.1% as accelerating production forecasts from the major supplying region offset worries over disruptions in edible oil supplies from the Black Sea region.

Meanwhile, improving crop conditions and an outlook for good growing weather pressure soybean futures lower and indirectly drag down CPO prices. The current weather hype is no longer just about weather forecasts but has entered a more substantive stage as production estimates are getting closer to reality. As we mentioned before, the El-Nino expectation could lift CPO prices if the impact turns out to be stronger than anticipated. As far as the labour issue is concerned, the ease of labour shortage will lead to higher palm oil production in the second half of the year. Another catalyst would be the rising palm oil discounts to rivals such as soybean oil and sunflower oil. However, we believe the high palm oil prices are unsustainable as competitiveness and demand will be impacted. All in all, we expect 2H23 CPO prices to be in the range of RM3900-4200/tonne.

Maintain Neutral

We reiterate our NEUTRAL recommendation for the Plantation sector. No change to our 2023 average CPO price estimate of RM4,000/tonne. Maintain HOLD on SIMEPLT (TP: RM4.64), IOICORP (TP: RM4.20) and BUY on TSH (TP: RM1.10) and Wilmar (TP: SGD5.34), Meanwhile, FGV (TP: RM1.45), KLK (TP: RM20.84), KIML (TP: RM1.75) and UMCCA (TP: RM4.78) remained as SELL.

Key downside risks to our sector recommendation include: i) higher-than-expected rise in soybean production, which would likely compress prices of other edible oils in the market; ii) weaker-than-expected demand in China and India, iii) delay in global economic recovery due to prolonged COVID-19 pandemic, and iv) unfavourable government policies, which will affect the demand for palm oil.

Source: TA Research - 11 Aug 2023