Higher palm oil output seen offset by stronger exports

TheEdge Fri, Jul 12, 2019 11:18am - 4 years View Original


Agribusiness sector
Maintain neutral:
Malaysia’s palm oil stocks fell 1% month-on-month (m-o-m) (+11% year-on-year [y-o-y]) to an 11-month low of 2.42 million tonnes as at end-June 2019. This was 1.6% above our projection of 2.39 million tonnes and 3.1% above Bloomberg and Reuters’ consensus forecasts of 2.35 million tonnes, due to higher imports and lower domestic consumption. We are negative on the higher-than-expected palm oil stocks as production is expected to pick up in the second half of 2019 (2H19).

 
Crude palm oil (CPO) production fell 9% m-o-m (+14% y-o-y) due to lower productivity at the estates, possibly due to the Hari Raya holidays when some estate workers took leave to be with their families. The concern is that production has remained strong relative to the previous year, and has been tracking above our expectations over the past few months as well as the previous year’s level. Production for 1H19 grew 10% to 9.7 million tonnes, representing 48% of our full-year forecast of 20.3 million tonnes (+4% y-o-y).

Palm oil exports fell 19% m-o-m but grew 22% y-o-y to 1.38 million tonnes in June, in line with our expectation. The decline was due to poorer demand from China, India, the European Union and the US, possibly due to destocking activities. Malaysia’s palm oil imports rose 64% m-o-m to 101,000 tonnes in June 2019 causing 1H19 palm oil imports to jump 80% to 532,000 tonnes.

We project palm oil stocks to stay flattish at 2.4 million tonnes at end-July 2019F (forecast) as higher production is offset by stronger exports. Malaysian palm oil stocks typically bottom in June (30% over the past 10 years).

Current palm oil stock of 2.42 million tonnes remains high relative to the five-year historical average of 2.07 million tonnes. We expect the CPO price to trade in the range of RM1,900-RM2,200 per tonne in July. Key events to watch out for in July are planting progress and crop rating of soybean in the US (currently behind historical rate), Indonesia’s pursuit of B30 biodiesel mandate, crude oil price and developments in the US-China trade dispute. We are reviewing our CPO price forecast of RM2,400 per tonne for 2019F with downside risk but keep our “neutral” view on the sector. Key upside/downside risks to our call are higher or lower CPO prices. Our picks in Malaysia continue to be Genting Plantations Bhd and Hap Seng Plantations Holdings Bhd. — CGSCIMB Research, July 10

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