Stockpiles Fall Further in December

Malaysia Palm Oil Board's (MPOB) December 2023 data showed a further drop in overall numbers, including production, stockpiles, imports, and exports. Palm oil stockpiles fell for the second straight month (-4.6% MoM) to 2.29mn tonnes, which was below market expectations. The decline in stockpiles was mainly due to lower production (-13.3% MoM) and imports (-7.9% MoM). Exports meanwhile declined by 5.1% MoM to 1.33mn tonnes while the domestic usage also weakened to 364.4k tonnes (-21.9% MoM). Overall, we view the MPOB data as slightly bullish for the market.

Production Declined 13.3% MoM

CPO production declined 13.3% MoM to 1.55mn tonnes, which was slightly below the consensus estimate of 1.60mn – 1.61mn tonnes. The drop in production was in line with the seasonal downtrend period. In terms of FFB yield, the average FFB yield in Peninsular Malaysia decreased the most by 13.4% MoM to 1.42 tonnes/ha, followed by Sabah (-11.5% MoM to 1.38 tonnes/ha) and Sarawak (-10.9% MoM to 1.23 tonnes/ha). Overall, the YTD FFB yield increased by 1.7% YoY to 15.78 tonnes/ha. However, it is still below the pre-pandemic level of 16 -17 tonnes/ha. YTD production was flat at 18.55mn tonnes (+0.5% YoY). As highlighted before, we expect the lowyielding season to persist until 1Q 2024 before production picks up again in 2Q 2024.

Exports Continue to be Weak

Exports fell further in December to 1.33mn tonnes due to lack of strong demand from major destinations. The exports were within market predictions of 1.31mn – 1.38mn tonnes. YTD, total exports were weaker at 15.10mn tonnes (-3.9% YoY). Looking forward, cargo surveyors, Intertek and Amspec estimated that palm oil exports for the first ten days of Jan 2024 would decrease by 3.94% and 9.79% MoM to 354k and 349k tonnes, respectively.

CPO Prices Rebound But Are Capped by Weak Demand

The benchmark 3-month CPO futures contract on Bursa Malaysia Derivatives (BMD) surged recently on expectations that a seasonal trend of lower production will reduce palm oil inventories. This is coupled with the view that the attacks on some commercial vessels by the Houthis militia in the Red Sea would also raise concerns about global vegetable oil supplies due to higher freight costs and delivery times.

However, CPO price upside has been capped by dwindling demand from key destination markets as well as weaker prices of soybean and sunflower oils. Meanwhile, imports are also expected to slow down in 1Q24, as palm oil imports usually moderate during the winter months as they solidify at lower temperatures.

On the other hand, total vegetable oil stocks are still relatively high in China. We gathered that, as of 5 January, soybean stocks had increased to about 5.5mn tonnes, which was far higher than the same period in the past three years. That said, we expected exports to China would not regain any momentum in the near term.

Expectations of a bumper harvest in South America also sent soybean prices down recently, which negatively affected CPO prices. Lastly, according to the Australian Bureau of Meteorology, the model forecasts indicate that the warmth of sea surface temperatures (SSTs) is likely at or near its peak and the Indian Ocean Dipole event is weakening steadily and is likely to continue to ease over the coming weeks. This suggests that the El Nino event may be over soon.

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) and IOICORP (TP: RM4.27). Meanwhile, KLK (TP: RM21.50), FGV (TP: RM1.41), and UMCCA (TP: RM4.01) remained as SELL. Lastly, TSH (TP: RM1.14), KIML (TP: RM2.23) 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 - 11 Jan 2024