• Malaysia’s September 2024 Palm Oil (PO) end-stocks increased by +6.9% MoM to 2.01mn tonnes, despite a drop in CPO production to 1.82mn tonnes (-3.8% MoM) and a slight increase in PO exports to 1.54mn tonnes (+0.9% MoM).
   
• September average CPO price was higher at RM4,024/MT (+2.9% QoQ). We believe this is due to market sentiment driven by escalating geopolitical tensions in the Middle East and Black sea region. Cumulatively, YTD prices increased to RM4,007 (+3.2% YoY), which is slightly above our expectations.

• We are revising our 2024 and 2025 CPO average selling price assumption higher to RM3,900/MT (previously 2024: RM3,800/MT, 2025: RM3,600/MT), along with trading range of ±RM400/MT around RM3,900/MT for the rest of this year and next year.

• Maintain NEUTRAL call on the sector. We favour IOI (BUY; TP: RM4.50) for its higher FFB output, lower costs, and improved downstream earnings from the oleochemical and specialty fats subsegments.

Inventory Levels Increased to 2mn Tonnes in September.

Malaysia’s September Palm Oil (PO) end-stocks rose by +6.9% MoM hitting a 2.01mn tonnes levels, despite a drop in CPO production to 1.82mn tonnes (-3.8% MoM) and a slight increase in PO exports to 1.54mn tonnes (+0.9% MoM). The rise in exports is believed to be driven by strong buying from India ahead of its 20% import tax hike on edible oil and demand stocking up activities for the Deepavali festival. Meanwhile, CPO production fell by -3.8% MoM, dampened by lower output from Peninsular Malaysia (-7.2% MoM) and Sarawak (-3.1% MoM), partially mitigate by higher production in Sabah (+5.3% MoM). We believe this decline is due to a temporary biological tree fruiting rest following strong production in the previous month, along with a lower FFB yield of -4.2% MoM. Nevertheless, we expect production to pick up again and remain strong until early November.

Market Sentiment on Geopolitical Tensions Boosts CPO Prices

In September, CPO prices increased by 2.9% MoM, averaging RM4,024/MT, with recent trading reaching as high as RM4,300. This rise was driven by market sentiment amid escalating geopolitical tensions in the Middle East and Black Sea region. Concerns over potential disruptions to Iran's oil supply are pushing crude oil prices higher, which is indirectly supporting CPO prices, given its use as a biofuel feedstock. However, we believe this is a short-term, knee-jerk reaction that is unlikely to sustain CPO prices in the long run. Additionally, we remain cautious about near-term CPO demand due to a lack of competitiveness, as CPO is currently trading at a premium over other edible oils, particularly soybean oil. At the time of writing, CPO holds a USD32/MT premium over soybean oil, which is likely to exert downward pressure on CPO prices moving forward.

Outlook: Positive Bias on Higher CPO Price.

The YTD average CPO price is RM4,007, representing a +3.2% YoY increase, which slightly exceeds our expectations. Looking ahead, we anticipate CPO prices to trade within a ±RM400/MT range around RM3,900/MT for 2024 and 2025, with a positive bias due to several key factors:

• Increase in global biodiesel usage. Indonesia plans to increase its biodiesel mandate to B40 in 2025, with the potential for further expansion to B50 in 2026, which will push up demand for CPO. Coupled with rising global use of edible oils in biodiesel and sustainable aviation fuel (SAF) production, this could lead to stable or higher CPO prices.
• Higher demand supported by better economic growth. Better global economic growth and recovery in China's economy due to new government stimulus initiatives, is expected to boost demand and imports of edible oils, including CPO.
• Escalating geopolitical tension. Prolong and higher severity of conflicts between Russia-Ukraine and in the Middle East could disrupt the supply of edible oils likesunflower and rapeseed oils, leading to higher demand for substitute oils, thus keeping CPO prices at elevated levels.
• Adverse weather conditions. Climate change, particularly in South America specifically Brazil, Russia, and Europe pose risks to new plantings and the production of edible oils for the 2024/25 growing season, hence, further supporting CPO prices.

Key downside risks to our CPO price outlook are:

• Expected ample US soybean supplies. The United States Department of Agriculture (USDA) reports impressive global soybean production estimates for the 2024/25 season, projecting an 8.6% YoY increase to 429mn tonnes. US soybean production, ending stock, and crush are expected to increase by 10%, 62%, and 6% YoY respectively, signaling ample supply in the market.
• Changes in tax policies by India and Indonesia. Indonesia recently lowered its CPO and refined palm oil export tax to 7.5% and 3-6%, effective 21st September 2024. Meanwhile, India raised its import tax on edible oils by 20%, effective 14th September2024. These tax changes could make Indonesia’s palm oil exports more competitive than Malaysia’s and potentially leading to softer demand for Malaysian palm oil products from India.
• Narrower discount to soybean Oil. We anticipate that the current premium of CPO prices over other edible oils particularly soybean oil, will normalize and return to a discount. However, we expect CPO to continue trading at a narrower discount to soybean oil. Along with a strengthening ringgit, this could make CPO less attractive to importers.

Maintain NEUTRAL on the Sector

Given the aforementioned factors, we foresee that CPO prices exhibiting volatility as various dynamics come into play. Accordingly, we are revising our 2024 and 2025 CPO average selling price assumption higher to RM3,900/MT for both years (previously 2024: RM3,800/MT, 2025: RM3,600/MT), along with trading range estimates of roughly RM400/MT above or below RM3,900/MT for the rest of this year and next year. Note that the ASP realized for CPO by companies under coverage varies around RM3,700- RM4,100/MT, and we maintain our earnings forecast for these companies pending the upcoming results announcement. We reiterate our NEUTRAL call on the plantation sector due to the absence of new notable catalysts. For exposure, we favour IOI (BUY; TP: RM4.50) due to higher FFB output, lower costs, and improved downstream earnings from the oleochemical and specialty fats sub-segments

Source: BIMB Securities Research - 11 Oct 2024