CPO inventory extended its decline to 1.84m mt in Nov after seeing a sharp pullback in exports despite production was down for a third straight month. However, it was slightly higher than the market estimates of 1.8m mt. We expect the tight supply situation to ease in the coming months, thus, the current CPO price momentum may not be sustainable, and a price correction would be inevitable once the inventory level rebounds. At the point of writing, CPO futures tumbled RM163 to RM4,957/mt. Maintain Neutral on the sector.

• Inventory eased to a 4-month low. During the month, palm oil inventories shrank 2.6% MoM and 23.6% YoY to 1.83m mt. Meanwhile, the stock-to-usage ratio rebounded from 8.1% to 9% as exports declined at a faster pace than the production.
• A steep decline in exports. Following a sharp gain in the previous month, CPO exports retraced 14.7% MoM to 1.48m mt, mainly dragged by China (-1%), EU (-38.8%), India (-42.2%), and Middle East (-8.5%), partially offset by strong demand from the US (+112.2%). We attributed the weaker demand to two notable factors, namely, excessively high selling prices and solidification of palm oil during winter, which makes it difficult for storage and consumption.
• Production down for third straight month. CPO production slid 9.8% MoM to a 5-month low of 1.62m mt. The weaker production, which saw the steepest decline in 9 months, was mainly dragged by lower production from Peninsular Malaysia (-9.6%) and East Malaysia (-10%). All states contributed to the lower production in line with the seasonal output trend.
• Indonesian biodiesel mandate outlook. The nation is boosting its mandatory blending rate of biodiesel with regular diesel fuel to 40% beginning 1st Jan 2025 with a goal to reach 60% biodiesel content within this decade. Since mid-2015, the biodiesel mandate has resulted in increasing biodiesel consumption when the government started subsidising its production using the proceeds from palm oil export levy. That support means that blended diesel costs only 43 cents/litre at petrol stations, half the price of conventional diesel. However, we think that this mechanism may not be sustainable for long, as the palm fund management agency has estimated that the 40% mandate would require USD3bn subsidies next year, while the excise levy is estimated to be around USD1.3bn. The agency's USD2bn reserves should be sufficient to cover the shortfall in 2025, but either higher levies on palm oil exports or lower fuel subsidies would be needed in the subsequent years, even without taking further blend rate rises into account.
• Eyeing strong catch-up in final quarter. It was another subdued performance for the third quarter due to weak production recovery and higher production costs. Nevertheless, we expect a catch-up in the final quarter on the back of stronger CPO prices and lower production cost. During the quarter, the sector experienced i) slower-than-expected FFB production growth, dragged by the biological tree stress in Central Kalimantan and Sarawak due to the lagged effect of El Nino in 2023, ii) higher fertiliser application, iii) lower OER due to a decline in FFB input and iv) positive CPO price outlook given by the respective management. Under our universe of coverage, 3Q 2024 realised CPO price averaged at RM3,903 (+6.9% YoY and -1.4% QoQ) vs MPOB's RM4,000/mt (YoY: +5.2% and QoQ: -0.9%), IOI Corporation registered the highest average CPO price for the quarter at RM4,059/mt, followed by SD Guthrie's RM3,949/mt while Genting Plantation's RM3,725/mt was the lowest.
• The third quarter was mixed for FFB production. Sarawak Plantation topped the production growth with 3.7% followed by Ta Ann's 2.7%. Average FFB production slipped 4.5% YoY but rose 10.1% QoQ. Meanwhile, MPOB statistics showed an increase of 7% YoY and 15.2% QoQ.
• We also observed that higher inventory levels in some plantation companies as they plan to unload in the final quarter at higher selling prices. Despite the higher export tax structure effective November, there is no positive sign from Malaysian refineries given the wide gap between Malaysian and Indonesian selling prices. In addition, the higher refined CPO selling prices have reduced buying interests. Post-results briefing, we made no changes to our call for the respective plantation companies as we expect to see stronger performance in the final quarter given the favourable CPO price outlook. 0500

Source: PublicInvest Research - 11 Dec 2024