Stockpile Rise to Four-Month High

The Malaysia Palm Oil Board (MPOB) reported that palm oil stockpiles rose for the third consecutive month to 1.83mn tonnes in June, in line with market expectations. Production decreased by 5.2% MoM to 1.62mn tonnes, consistent with forecasts. Meanwhile, exports declined by 12.8% MoM to 1.21mn tonnes, though within the lower end of estimates. Imports saw a sharp decline of 43.5% MoM, totalling 11.7k tonnes, while domestic consumption edged up by 4.3% to 345.5k tonnes.

YTD, production increased by 9.8% YoY to 8.88mn tonnes, counterbalancing the rise in exports (+6.1% YoY to 7.52mn tonnes). Imports plummeted by 70.2% YTD to 151k tonnes, while domestic consumption remained nearly unchanged at 197mn tonnes (-0.6% YoY). In summary, the MPOB's June data suggests a neutral outlook for the market, in our view.

CPO Production Normalcy in June

CPO production decreased by 5.2% MoM to 1.62mn tonnes, meeting expectations. This typical production pattern in June supports our observation that a "mini peak" in production often follows after the Hari Raya celebration, when harvesting activities intensify (in May-24). YoY, production increased by 16.4%, indicating a sustained recovery in production levels.

The YTD production increase of 9.8% to 8.88mn tonnes is primarily attributed to improved harvesting activities, following the resolution of past labour shortages. We anticipate further production growth in the coming months, consistent with seasonal trends.

Weaker Exports in June

Exports reduced by 12.8% MoM to 1.21mn tonnes in June. However, on a YoY basis, exports showed a modest increase of 2.9%. YTD, total exports have grown by 6.1% YoY to 7.52mn tonnes. Looking forward, cargo surveyors Intertek and Amspec project that palm oil exports for the first ten days of July 2024 will surge by 82.06% and 85.86% MoM to 536,000 tonnes and 528,000 tonnes, respectively.

CPO Price May Remain Volatile

As expected, the palm oil production has entered a growth cycle with inventories continue on the rise. According to Malaysian Meteorological Department, the forming of La-Nina is expected between July and September and reaches its peak towards the end of the year and continues into the beginning of next year. As we mentioned before, La-Nina's heavy rainfall increases flood risks in low-lying areas, potentially disrupting short-term palm oil production by delaying harvesting and FFB evacuation. This could cause a short-term surge in palm oil prices. However, we anticipate that in the long term, the increase in palm oil production in 2025 due to this above-average rainfall lagging impact will mitigate significant rises in CPO prices, as it enhances growth conditions and yields.

Meanwhile, the surge in exports observed in the first 10 days of July, according to cargo surveyors, might be temporary, in our view. This increase may attribute to panic buying driven by concerns that China could boycott Indonesian imports and redirect their palm oil demand from Indonesia to Malaysia. This response from China is seen as retaliation against potential tariffs that Indonesia may impose on China-made product. On the other hand, the La-Nina phenomenon may complicate growing conditions for U.S. soybeans. At the same time, Brazilian soybean exports are anticipated to decrease seasonally in the 3Q. Escalating trade tensions, impending U.S. elections, and concerns about a potential resurgence of tariff conflicts in the future have spurred some buyers to expedite their purchases to mitigate potential future trade restrictions. Meanwhile, buying interest has also increased due to current soybean prices remaining near four-year lows. Overall, we anticipate volatility in CPO prices due to numerous uncertain factors.

Maintain Neutral

We reiterate our Neutral recommendation for the Plantation sector. No change to our 2024 average CPO price estimate of RM4,000 per tonne and RM3,800 for 2025. We would review our assumptions if: 1) South America's soybean supply turns out to be lower than market expectations, 2) a more promising demand recovery story, 3) lower-than-expected palm oil production, and 4) significant reductions in production costs.

We have now incorporated our proprietary Environmental, Social, and Governance (ESG) scoring system into our stock valuations to align investment decisions with broader considerations of sustainability, corporate responsibility, ethical practices, and environmental impact. We have applied a 3% premium to SDG (TP: RM4.65), IOICORP (TP: RM4.29), KLK (TP: RM23.31) and UMCCA (TP: RM: 5.59), Wilmar (TP: SGD4.16) based on their 4-star ESG ratings (★★★★). Meanwhile, the target price for FGV (TP: RM1.34), TSH (TP: RM1.22) and KIML (TP: RM2.50) have been maintained, reflecting their 3-star ESG ratings (★★★).

We have upgraded KLK (TP: RM23.31) from Hold to BUY following a recent drop in its share price, which offers greater upside potential. Anticipated improvements in downstream demand are also catalysts for earnings. Meanwhile, TSH (TP: RM1.22) has been downgraded to SELL from Hold due to its limited upside.

Source: TA Research - 11 Jul 2024