Stockpile Surged in April

The Malaysia Palm Oil Board (MPOB) reported an unexpected increase in palm oil stockpile for April, breaking a streak of five consecutive months of decline. This contradicted market view, which was anticipating a decrease in stockpile due to reduced harvesting during the Hari Raya holidays and a slowdown in palm oil production. The stockpile grew by 1.9% MoM and 16.5% YoY reaching 1.74mn tonnes. This defied the consensus estimate of a drop to 1.63mn - 1.68mn tonnes.

The increase in stockpile was primarily attributed to declines in exports to 1.23mn tonnes (-7.0% MoM) and domestic usage to 270.8k tonnes (-8.2% MoM). Conversely, imports surged by 58.8% YoY, totalling 31.8k tonnes.

Year-to-date (YTD), the production saw a notable increase of 8.6% YoY to 5.56mn tonnes, offsetting the rise in exports (+ 2.0% YoY to 4.94mn tonnes) and domestic usage (+1.5% YoY to 1.29mn tonnes). YTD imports, however, plummeted by 59.3% to 119k tonnes.

In summary, the MPOB's April data suggests a bearish outlook for the market, given the unexpected rise in stockpile.

Production Up More Than Expected

CPO production surged 7.9% MoM to 1.50mn tonnes, surpassing the consensus forecast of a decline to a range between 1.45mn and 1.46mn tonnes. Typically, production would usually dip during the Hari Raya month due to reduced working days and diminished harvesting activities by estate workers. On a YoY basis, the production rose by 25.7%, marking the most significant monthly increase since June 2020.

Meanwhile, we attribute the YTD increase of 8.6% to 5.56mn tonnes primarily to enhanced harvesting activities as the past labour shortage issue has been resolved. Most of the plantation companies within our coverage have adequate workers for harvesting FFB and trimming fronds. We foresee further production growth in upcoming months, in line with the seasonal trend.

Weaker Exports in April

Exports experienced a 7.0% MoM decline to 1.23mn tonnes following a surge in festive buying in March. However, on a YoY basis, it increased by 13.5%. YTD, total exports have returned to the positive territory, growing by 2.0% YoY to 4.94mn tonnes. Looking ahead, cargo surveyors Intertek and Amspec estimate that palm oil exports for the first ten days of May 2024 will decrease by 14.2% and 14.8% MoM to 370k and 363k tonnes, respectively.

Palm Oil and Soybean Trends: 2Q Insights

We anticipate a rise in palm oil stockpiles in the 2Q, driven by higher production. With foreign workers returning to estates after the Ramadan festival celebrations, harvesting is expected to accelerate, thereby boosting palm oil production. We may observe a mini peak in production in May, potentially limiting significant increases in CPO prices.

In Brazil, according to CONAB (the national crop agency), the soybean harvest is nearing completion, reaching 94.3%. However, recent data from the agency indicate a downward revision in Brazil's 2023/24 soybean crop to 146.5mn tonnes (down by 5.2% YoY). Severe flooding caused by heavy rains has caused substantial damage to crop in Brazil, particularly in Rio Grande do Sul, the country's second-largest soybean producer after Mato Grosso. Rio Grande do Sul was projected to harvest 38mn tonnes of soybeans but has only completed 75% of the harvest. The soybeans in Rio Grande do Sul that have not been harvested represent a potential production loss of 6.5mn tonnes, and the total losses are yet to be determined as the transit of grains to the port may also be affected. Meanwhile, soybean production in Argentina is forecasted to increase by 1.5mn to 51mn tonnes in 2024/25. However, the country is experiencing harvest delays of approximately 10% due to excessive rainfall, compounded by worker strikes protesting the government's anti-worker policies.

We anticipate that the movement of palm oil prices in coming months will be influenced by both palm oil production in key producing countries (Malaysia and Indonesia) and weather patterns in the primary soybean-growing regions of Brazil and Argentina. Additionally, the import appetite for palm oil may remain stagnant in the 2Q due to the absence of major festive celebrations, which typically boost demand.

Maintain Underweight

We reiterate our UNDERWEIGHT recommendation for the Plantation sector. No change to our 2024 average CPO price estimate of RM4,000 per tonne. We would review our assumptions under certain conditions if: South America's soybean supply turns out to be lower than market expectations, a more promising demand recovery story, and significant reductions in production costs.

Maintain BUY recommendation on KIML (TP: RM2.50), Willmar (TP: SGD4.04), and HOLD on UMCCA (TP: RM5.38) and FGV (TP: RM1.50). Meanwhile, SIMEPLT (TP: RM4.46), IOICORP (TP: RM3.79), KLK (TP: RM21.50), and TSH (TP: RM1.14) remain as SELL.

Source: TA Research - 13 May 2024