Stockpiles Fell 1.1% MoM

Malaysia Palm Oil Board (MPOB)’s November 2023 palm oil data shows palm oil stockpiles fell for the first time after six consecutive months of increases. The marginal drop in stockpiles (1.1% MoM) to 2.45mn tonnes was mainly due to lower production (-7.7% MoM) and higher domestic usage (+24.1% MoM), which offset the drop in exports (-5.7% MoM). Meanwhile, imports also fell 16.5% MoM to 39.7k tonnes. (refer to Figure 1).

Production Declined 7.7% MoM

CPO production shrank 7.7% MoM to 1.79mn tonnes, which was slightly below the consensus estimate of 1.81mn – 1.82mn tonnes. The drop in production indicated that the peak production for the year had already ended in October. In terms of FFB yield, the average FFB yield in Sarawak decreased the most by 9.8% MoM to 1.38 tonnes/ha, followed by Sabah (-5.5% MoM to 1.56 tonnes/ha) and Peninsular Malaysia (-5.2% MoM to 1.63 tonnes/ha).

Overall, the YTD FFB yield increased by 2.1% YoY to 14.43 tonnes/ha. However, it is still below the pre-pandemic level of 15-17 tonnes/ha. YTD production increased by merely 1.0% YoY to 16.8mn tonnes. We expect the low-yielding season to persist until 1Q 2024 before production picks up again in 2Q 2024.

Weaker Exports in Nov

Exports declined 5.7% MoM to 1.40mn tonnes after a strong rebound in October. The exports were within market predictions of 1.38mn – 1.53mn tonnes. YTD, total exports were weaker at 13.75mn tonnes (-3.4% YoY) mainly due to lower demand from the EU, China and India. Looking forward, cargo surveyors, Intertek and Amspec estimated that palm oil exports for the first ten days of Dec-23 would decrease by 7.38% and 4.09% MoM to 369k and 387k tonnes, respectively.

Price Pressure Amid Gloomy China Outlook and Dwindling Demand

The CPO futures contracts on Bursa Malaysia Derivatives (BMD) have been fluctuating between RM3,600 and RM3,800 per tonne. The gloomy outlook and Moody’s downgrade on China’s credit rating have sparked an expectation of a worsening economy in China. This has triggered concerns that demand from China, being one of the major importers of palm oil, will fall due to the country’s weak economic outlook. Meanwhile, imports are also expected to slow down in 1Q24 as palm oil imports usually moderate during winter months as it solidifies at lower temperatures. We gather that total vegetable oil stocks are still relatively high in China. The drop in crushing margin also prompted soybean stocks to continue to increase in December.

Overall, although the current weather speculation in South America is still ongoing, with the improving rainfall trend and the high probability of a bumper harvest in South America, we do not expect a strong rebound in soybean prices.

Maintain Neutral

We reiterate our NEUTRAL recommendation for the Plantation sector. No change to our 2024 average CPO price estimate of RM4,000/tonne. Maintain HOLD on SIMEPLT (TP: RM4.67), IOICORP (TP: RM4.27) and KIML (TP: RM1.95). Meanwhile, KLK (TP: RM21.50), FGV (TP: RM1.41), and UMCCA (TP: RM4.01) remained as SELL. Lastly, TSH (TP: RM1.14) and Wilmar (TP: SGD4.58) are 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 - 13 Dec 2023