Malaysia’s palm oil inventories in May fell to the lowest level in more than 5 years as exports jumped at a bigger pace than production. Inventories fell 8.8% MoM to 1.65m mt, contracting for 6 consecutive months to the lowest since March 2011. It is also slightly lower than the consensus estimates of 1.66m mt. CPO prices have been holding up firmly around RM2,500/mt-2,600/mt levels, supported by low inventory levels and slower-than-expected recovery of production. We maintain our positive stance on the CPO outlook with an average CPO price forecast of RM2,500/mt for 2016 and RM2,600/mt for 2017.

Inventories falling since Nov 2015. Inventories dropped for 6 straight months to 1.64m mt, the lowest in more than 5 years. Stock-to-usage ratio dipped to 8.9% from 10.6% in the previous month as exports grew at a bigger pace than inventories.

Exports rebounded. Palm oil exports grew by 9.3% MoM but it shrank 20.5% YoY. The encouraging exports data was attributed to a pick-up in demand ahead of Muslim festivals.

Production climbed for third straight month. CPO production has been recovering albeit at a slower pace. May production rose 4.9% MoM to 1.36m mt, which is also the lowest level since 2007. East Malaysia jumped 9.2% MoM while Peninsular Malaysia was up 1% MoM. Going forward, we expect FFB production to improve gradually as it enters high production cycle period. Nevertheless, the pace of recovery could be slow as the extreme dry weather condition has just ended.

A slow start. For the 1st ten days of June 2016, Malaysia’s CPO exports fell 5.9% from a month earlier, according to Intertek. Based on the MPOB reference price from 10 May to 9 June 2016, the average CPO price of RM2,632/mt will likely maintain the CPO export duty at 5.5% for the month of July.

CPO price holding well in May. May’s 2016 average CPO price was lower at RM2,619/mt compared to RM2,648/mt in April. However, it is significantly higher compared to May 2015’s RM2,161/mt. YTD, CPO price averaged at RM2,515/mt, which is slightly higher than our full-year estimate of RM2,500/mt. We foresee that 1H CPO price could average around RM2,550/mt while 2H will drop to RM2,450/mt.

Source: PublicInvest Research - 13 Jun 2016