• Malaysia’s palm oil (PO) end-stocks for June surged by 4.3% MoM to 1.83mn tonnes, primarily driven by higher processed PO stock (+16.8% MoM)

• CPO production experienced a decline, slipping by 5.2% MoM to 1.62mn tonnes, primarily due to decreases in fresh fruit bunch (FFB) yield and OER by 2.1% and 1.4% MoM, respectively.

• Despite anticipated increased production and improved soybean crop conditions, several factors could support our CPO prices, including the attractive PO price discount compared to the SBO price and recovery in PO demand from major importing countries.

• We are revising our 2024 CPO average selling price assumption higher to RM3,800/MT (from RM3,600/MT), and maintaining our 2025 CPO forecast at RM3,600/MT, along with trading range estimates of roughly RM400/MT above or below RM3,800/MT for the rest of the year.

• Maintain a NEUTRAL call on the sector due to the absence of notable catalysts.

Stockpile remain on uptrend despite lower CPO production.

Malaysia's June palm oil (PO) end-stocks jumped to 1.83mn tonnes (+4.3% MoM), mainly due to a higher stock in processed PO, which increased by +16.8% MoM to 904,304 tonnes, negating the -5.5% MoM drop in crude palm oil (CPO) stock. Additionally, exports decreased by -12.8% MoM to 1.21mn tonnes, likely due to a higher base last month caused by major restocking activities from major importing countries i.e., India and China as their stock levels were running low, as well as buying interest following price corrections in May. PO imports continued to decline by 43.5% MoM to only 11,738 tonnes due to lower demand in the absence of any festivities season.

In contrast, CPO production experienced a decline, slipping by -5.2% MoM to 1.62mn tonnes. This was primarily due to a decrease in fresh fruit bunch (FFB) yield by 2.1% MoM to 1.40 tonnes per hectare, and a lower oil extraction rate (OER) by 1.4% MoM to 19.24%. All states reported a drop in production this month, with Sabah experiencing the greatest fall (-8.2% MoM, to 327,034 tonnes), followed by Peninsular Malaysia (-4.7% MoM, to 952,584 tonnes) and Sarawak (-3.8% MoM, to 335,665 tonnes). Nonetheless, it is expected that production will gradually improve before reaching its peak in the 3Q of 2024.

Overall, the average CPO price in June increased slightly by +1.4% MoM to RM3,958, mirroring gains in soybean oil prices and palm olein futures, as well as positive sentiment during the month that PO demand would increase due to a potential biodiesel mandate, which we believe has yet to take place.

CPO Price to Stay Volatile in the Near Term

Moving forward, assuming no major unexpected events, we anticipate continued moderation in CPO prices from the 1H2024 average level of RM4,018, with prices trading within a range of RM400/MT above or below RM3,800/MT for the rest of the year. This expectation is based on the following factors:

1. Ample soybean supplies. The United States Department of Agriculture (USDA) is reporting impressive global soybean production estimates for the 2024/25 season, increasing by 6.6% YoY to 422.26mn tonnes. Production in US is expected to increase by 6.8% YoY to 121.11mn tonnes. Additionally, higher soybean production is also anticipated from South America despite some weather disruptions in South Brazil and Argentina, with estimated production growth of +8.3% to 222mn tonnes.  

2. Higher production season. We expect Malaysia’s production trend to gradually increase, with peak output likely in Q3. This is supported by anticipated normalization of weather conditions (with El Niño risks subsiding and a mild La Niña), proper maintenance and manuring of oil palm estates, and improved productivity. Our projection for CPO production in 2024 is around 18.86 million tonnes. However, there is a risk of slower production and export growth in Indonesia due to the lagged impact of El Niño and anticipated higher domestic needs for potential increased biodiesel usage.

Despite these factors, there are several upside risks that could support our CPO price outlook:  

1. Attractive PO price discount compared to the SBO price. The discount between PO and SBO prices has widened compared to the previous months and is now close to its 5-year average discount, making the PO price more competitive (as of the time of writing: USD196.80/MT; 5-year average discount: USD233.63/MT).  

2. Stable demand. We anticipate a demand recovery in 2H2024 from major palm oil importing countries. In India, consumer goods consumption, especially in personal care and cooking products, is picking up, with higher demand expected for the Deepavali celebrations in October. In China, palm oil consumption is expected to increase due to the summer season and the Mooncake festival in September.  

3. Prolonged geopolitical tension. The crisis in the Black Sea and Red Sea has led to higher import costs of other edible oils, especially sunflower and rapeseed oils. This has, to a certain extent, contributed to the attractiveness of palm oil, particularly for nearby major importing countries such as South East Asia, India and China, due to the advantage of overall lower import costs and shorter delivery times.  

Given the aforementioned considerations, we foresee that CPO prices will exhibit volatility as various factors come into play. Accordingly, we are revising our 2024 CPO average selling price assumption higher to RM3,800/MT (from RM3,600/MT), while maintaining our 2025 CPO forecast at RM3,600/MT, along with trading range estimates of roughly RM400/MT above or below RM3,800/MT for the rest of the year. Note that the ASP realized for CPO by companies under coverage varies around RM3,600-RM4,000, and we maintain our earnings forecast for these companies pending the next results announcement. We reiterate our 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 - 11 Jul 2024