Stockpiles Hit 2mn Tonnes

According to Malaysia Palm Oil Board (MPOB), palm oil stockpiles rose for the fifth consecutive month to 2.12mn tonnes in Aug-23, beating the consensus forecast of 1.89mn -1.90mn tonnes. The higher production coupled with sluggish export growth have resulted in stockpiles surpassing 2mn tonnes. CPO production increased by 8.9% MoM to 1.75mn tonnes, while exports were lower at 1.22mn tonnes (-9.8% MoM). Meanwhile, imports increased 6.5% to 110.6k tonnes while domestic usage fell 27.1% MoM to 251.5k tonnes (refer to Figure 1).

Production Increased 8.9% MoM

CPO production surged 8.9% MoM to 1.75mn tonnes, beating market estimates of 1.72 – 1.73mn tonnes. The increase was in line with the seasonal up-trend. The ease of labour shortage also led to increased harvesting productivity, in our view. In terms of FFB yield, the average FFB yield in Peninsular Malaysia increased the most by 12.2% MoM to 1.56 tonnes/ha, followed by Sarawak (+8.6% MoM to 1.39 tonnes/ha) and Sabah (+5.6% MoM to 1.50 tonnes/ha). Overall, the YTD FFB yield increased slightly by 0.2% YoY to 9.66 tonnes/ha. We project the peak production would likely happen in 4Q this year before entering a low-yielding season in 1Q24. Note that for the last sixteen years, eight peak productions were recorded in Oct, four in September and two each in Aug and Nov.

Exports Dipped 9.8%

Exports weakened by 9.8% MoM to 1.22mn tonnes in Aug after two consecutive months of increases. YTD, total exports stood at 9.67mn tonnes (-1.4% YoY). Looking forward, cargo surveyors, Intertek and Amspec estimated that palm oil exports for the first ten days of Sep-23 would decrease by 11.2% and 20.4% MoM to 351k and 305.6k tonnes, respectively.

CPO Price May Rebound by Year-End

YTD CPO prices have averaged at RM3,904/tonne. To recap, the CPO price touched its fourmonth high at RM4,061/tonne on 25 July. However, it has struggled to hold above RM4,000/tonne since the end-July on concerns about weak demand and pressure from the heightened inventory outlook and narrowing discounts to sunflower oil in key markets, such as India and China.

We gathered that China’s import demand for palm oil has started its upward trend since July and surpasses the average stockpiles of the same period in the past 3 years. The total stock level of 3 major vegetable oils (palm oil, soybean oil and rapeseed oil) in China stood at 2.02mn tonnes in July, 12.5% higher than the previous month. The high vegetable oil stockpiles in China may suggest that the demand for the Mid-Autumn festival and Golden Week are not optimistic.

Meanwhile, India has been aggressively buying palm oil in the past few months and the total stock of edible oils in India was reported at 3.29mn tonnes as of 1st Aug, which is considered high considering India’s monthly estimated consumption of 1.9mn tonnes. However, we believe that the import demand from China and India could pick up again by the end of the year when palm oil enters the low production season as well as pipeline restocking activities before entering the winter months.

As for El-Nino, the development will likely continue until at least early 2024, according to Australia's Bureau of Meteorology (BOM). Although we do not expect a super strong El-Nino season to develop, we believe it will still have a positive impact on CPO prices as the event is deemed as being a strong market sentiment issue, even though the hit to yields probably would not show until next year.

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) and IOICORP (TP: RM4.27). Meanwhile, KLK (TP: RM21.28), FGV (TP: RM1.45), TSH (TP: RM1.02), UMCCA (TP: RM4.78) and KIML (TP: RM1.75) remained as SELL. Lastly, Wilmar (TP: SGD4.58) still rated as BUY.

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 - 12 Sept 2023