Stockpiles Grew for 3rd Consecutive Month

According to the Malaysia Palm Oil Board (MPOB), palm oil stockpiles surpassed 2mn tonnes for the third consecutive month in October. The rise in stockpiles (5.8% MoM) to 2.45mn tonnes was mainly driven by higher production, which offset the increase in exports. However, the increase was below the market estimate of 2.56mn - 2.59mn tonnes. CPO production increased by 5.9% MoM to 1.94mn tonnes, while exports were also higher at 1.47mn tonnes (+21.0% MoM). Meanwhile, imports dropped 3.1% MoM to 47.6k tonnes, while domestic usage plunged by 17.4% MoM to 383.6k tonnes (refer to Figure 1).

Production Increased 5.9% MoM

CPO production increased 5.9% MoM to 1.94mn tonnes, which exceeded the consensus estimate of 1.88mn – 1.89mn tonnes. The increase aligned with the seasonal trend, where productions have improved every month since July. In terms of FFB yield, the average FFB yield in Sabah increased the most by 9.4% MoM to 1.65 tonnes/ha, followed by Peninsular Malaysia (+5.8% MoM to 1.72 tonnes/ha) and Sarawak (+2.7% MoM to 1.53 tonnes/ha). Overall, the YTD FFB yield increased by 1.6% YoY to 12.89 tonnes/ha. We project the production to peak in November this year before trending down and entering a low-yielding season in 1Q24. Note that for the last sixteen years, eight peak productions were recorded in October, four in September, and two each in August and November.

Export Figures Stronger Than Expected in October

Exports were stronger by 21.0% MoM to 1.47mn tonnes in October, which was above market predictions of 1.29mn – 1.46mn tonnes. YTD, total exports stood at 12.34mn tonnes (-3.0% YoY). Looking forward, cargo surveyors, Intertek and Amspec estimated that palm oil exports for the first ten days of Nov-23 would increase by 1.0% and 1.9% MoM to 398k and 404k tonnes, respectively.

Easing Inventory Pressure Due to Seasonal Factor

Inventory pressure is expected to gradually ease due to seasonal factors. Productions are expected to enter the low production season starting in December and bottoming out in February before entering the next uptrend cycle. However, we cannot rule out the possibility that the development of El Nino may lead to less rainfall in the rainy season in the production areas, which may lead to higher production compared to the same previous period. This may cause the palm oil inventory to continue to increase, which will have a negative impact on CPO prices.

Meanwhile, we expect Indian edible oil stocks to decline in November due to holiday demand. We may need to pay attention to changes in the demand for Indian palm oil in the latter period. On the other hand, we believe that the import from China 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 and for the festive preparation.

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: RM4.27) and KIML (TP: RM1.95). Meanwhile, KLK (TP: RM21.28), FGV (TP: RM1.45), TSH (TP: RM1.02) and UMCCA (TP: RM4.01) remained as SELL. Lastly, Wilmar (TP: SGD4.58) is still rated as BUY.

Key downside risks to our sector recommendation include: i) a 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 - 14 Nov 2023