• Malaysia’s Palm Oil (PO) end-stocks surged in April after growing by +1.9% MoM to 1.74mn tonnes, mainly driven by a+7.9% increase in CPO production and -7% decrease in palm oil export.

• Looking beyond April, we anticipate a moderation in CPO price to continue due to increase in CPO production, improved US crop conditions and muted demand. We maintain our trading range estimates of circa RM400/MT above or below RM3,800/MT for the near term.

• Maintain a NEUTRAL call on the sector with a base-case 2024 average CPO price forecast of RM3,600/MT, given the risk of challenging earnings due to lower palm product prices and muted demand.

Inventory Increased as Production Gained Momentum. Malaysia's April Palm Oil (PO) end-stocks rose by +1.9% MoM to 1.74mn tonnes, dragged by higher stocks of Crude Palm Oil (CPO), which climbed by 21% MoM to 963,524 tonnes, partially offsetting the drop in Processed Palm Oil (PPO) by -14.8% MoM to 780,935 tonnes. The surge in inventory was primarily due to an increase in CPO production (+7.9% MoM) and a decrease in PO exports (-7% MoM). The lower exports in April were believed to be mainly due to the absence of festive-driven demand and stiff price competition from other edible oils.

Production Starting to Pick Up. CPO production improved by 7.9% MoM and 25.7% YoY to 1.50mn tonnes, which can be credited to normalizing availability in the labor force (harvesters) and an improved fresh fruit bunch (FFB) yield by +8.5% MoM and +27% YoY. Overall, all states reported increased production this month, with the highest contributions from Peninsular Malaysia (+7.3% MoM, +39.7% YoY to 855,528 tonnes), Sabah (+7.9% MoM, 10.3% YoY to 346,205 tonnes), and Sarawak (+9.4% MoM, 11.9% YoY to 300,208 tonnes). As for average April 2024 CPO price, it increased slightly by +0.9% MoM to RM4,255/MT, nonetheless, has drop to around RM3,809/ MT level recently as of 10th October 2024.

Outlook. Moving forward, we expect the production trend to gradually increase, with peak output likely in the end of 2Q or in the 3Q. This is supported by anticipated mild La Niña conditions, proper maintenance and manuring of oil palm estates, as well as improved productivity from newly hired foreign labour. However, we believe demand will continue to be hampered by switching activities to other edible oils, as CPO is still trading at a narrower discount to soybean oil (as of the time of writing: USD152.67/MT; 5-year average discount: USD235.99/MT), making it less attractive to importers. In tandem, stockpiles are expected to rise, and we are maintaining our forecast for ending stocks to be close to approximately 2.16mn tonnes and CPO production reaching around 18.86mn tonnes. It is envisaged that the absence of any foreseeable catalysts and stiff competition from other edible oils, as well as subdued global demand, will exert downward pressure on CPO prices, especially in 2H2024.

The recent concerns regarding disruptions to soybean production in Brazil due to flooding, especially in its southern state of Rio Grande do Sul, adverse weather conditions and geopolitical concerns impacting agriculture production in the Black Sea region, could generate excitement and pose prevailing upside risks to our CPO price forecast, potentially driving prices up.

However, at this juncture, we are maintaining our 2024 CPO average selling price assumptions of RM3,600/MT. This decision is based on several factors, including higher palm production, muted demand from major importing countries, inflationary pressures, and the anticipation that the discount gap between CPO and soybean oil will continue to narrow.

Maintain a NEUTRAL call on the plantation sector due to the absence of notable catalysts. We have a BUY call on IOI (TP: RM4.50) and a SELL call on FGV (TP: RM1.23).

Source: BIMB Securities Research - 13 May 2024