• Malaysia’s July 2024 Palm Oil (PO) end-stocks contracted by -5.4% MoM to 1.73mn tonnes, driven by a significant +39.9% MoM increase in export and a notable -10.7% MoM decrease in imports.

• CPO production rose by 14% MoM to 1.84mn tonnes, primarily due to higher in fresh fruit bunch (FFB) yield and OER by 11.4% and 1.0% MoM, respectively.

• We anticipate the average CPO prices will moderate due to increased production, ample soybean supplies, lower-than expected demand and the expectation that the discount gap between CPO and soybean oil will remain narrow.

• We maintain our 2024 CPO average selling price assumption of RM3,800/MT and RM3,600/MT for 2025, with an estimated trading range of approximately RM400/MT above or below RM3,800/MT for the remainder of the year.

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

A Drawdown in Palm Oil (PO) Stocks. Malaysia’s July PO end-stocks decreased by -5.4% MoM and remain flat YoY at 1.73mn tonnes, primarily driven by a sharp increase in export, which surged to 1.69mn tonnes (+39.9% MoM, 24.7% YoY). This was further supported by a decline in PO imports to 10.5k (-10.7% MoM). The increase in export is believe to be driven by restocking activities in major importing countries. Notably, India’s palm oil imports surged to their highest level in July as refiners accelerated purchases following a price correction and in anticipation of a potential import duty hike. However, during the budget announcement on 23rd July, the Indian government did not implement any changes to the duty structure on edible oils. Overall, this has led to the average CPO price in July trending at RM4,034/MT (+1.9% MoM, +3.5% YoY).

Production Picking Up. July CPO production improved to 1.84mn tonnes (14% MoM, 14.4% YoY) as the industry entered its seasonal peak production phase, with FFB yield increasing to 1.56 (+11.4% MoM, +13.9% YoY), and OER rising to 19.44 (+1.0% MoM, -0.5% YoY). Production is expected to remain elevated, peaking in the 3Q through early November. Most states reported increased production this month, with the largest contributions from Peninsular Malaysia (+15.3% MoM, +27.36% YoY to 1,098,327 tonnes), followed by Sarawak (+18.5% MoM, +0.52% YoY to 397,918 tonnes). Sabah saw a minimal growth of +5.4% MoM but experienced a slight YoY decline of -1.97% to 344,754 tonnes.

CPO Price to Stay Volatile in the Near Term

Moving forward, barring any major unexpected events, we anticipate a moderation in CPO prices in 2H2024 from the YTD average of RM4,000/MT. Currently, prices are trading within a range of RM3,900 to RM3,700 in August. This moderated price expectation is based on the following factors:

1. Ample soybean supplies. Global supply of soy bean remains robust, with subdued demand from major importing countries like China, driven by reduced animal feed needs due to a decline in hog breeding. 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.

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 18.86mn tonnes.

3. Narrowing PO price discount compared to the SBO price. The CPO is currently trading at a narrower discount to soybean oil (as of the time of writing: USD73/MT;5-year average discount: USD232/MT), making CPO less attractive to importers.

Nonetheless, there are several upside risks that could support CPO price outlook:

1. Stable demand. A stable palm oil demand in 2H2024 from major importing countries driven by increased consumer goods consumption, particularly in personal care and cooking products, in India. Additionally, higher demand is anticipated for the upcoming festive season (i.e. Deepavali and Mooncake festival).

2. Prolonged geopolitical tension. The ongoing crisis in the Black Sea and Red Sea hasled to higher import costs of other edible oils, particularly sunflower and rape seedoils. This has, to a certain extent, made palm oil more attractive to major importing countries in Southeast Asia, India, and China, due to lower overall import costs and shorter delivery times.

3. Potential lower exports from Indonesia and biodiesel mandate demand. There is a risk of slower production and export growth in Indonesia due to the lagged impact of El Niño and anticipated higher domestic consumptions from compulsory local sales for cooking oil, as well as potential increases in biodiesel usage. Indonesia aims to raise its biodiesel mandate from B35 to B40 in 2025. Exacerbating the matter, Indonesia's President Prabowo Subianto has also pledged to raise the mandate further to B50 to reduce oil imports, though no timeline has been set yet.

Maintain NEUTRAL on the Sector

We maintain our 2024 CPO average selling price assumption of RM3,800/MT and RM3,600/MT for 2025 at this juncture, with an estimated trading range of approximately RM400/MT above or below RM3,800/MT for the remainder of the year. The upcoming 2Q24 results are expected to be strong, especially for companies focused heavily on the upstream segment, due to improvements in FFB and CPO production, stable average CPO prices and anticipated lower manuring costs. We reiterate our NEUTRAL call on the plantation sector due to the absence of new 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 Aug 2024