• Malaysia’s August 2024 Palm Oil (PO) end-stocks increased by - 7.3% MoM to 1.88mn tonnes, driven by higher Crude Palm Oil (CPO) production of 1.89mn (+2.9% MoM) and lower export of only 1.53mn (-9.7% MoM).

• Average CPO price in August trending lower by -3.1% QoQ at RM3,911/MT. We anticipate the average CPO prices will continue to moderate over the next couple of months due to seasonal higher in CPO production, ample supply of soybean, unattractive CPO due to a narrower discount gap to soybean, and the strengthening of ringgit may impact CPO export competitiveness.

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

• We reiterate a NEUTRAL call on the sector due to the absence of new notable catalysts. We favour IOI (BUY; TP: RM4.50) for its higher FFB output, lower costs, and improved downstream earnings from the oleochemical and specialty fats sub-segments.

Inventory Increased as Production Gained Momentum.

Malaysia’s August Palm Oil (PO) end-stocks rose by +7.3% MoM, lifted by higher production (+2.9% MoM to 1.89mn tonnes) and slower exports which contracted by -9.7% MoM to 1.53mn tonnes. The higher inventory was due to increased stocks for both Crude Palm Oil (CPO) and Processed Palm Oil (PPO), which climbed +2.5% and +12.8% MoM respectively to 953,145 tonnes and 930,069 tonnes during the period. We expect stock levels to remain elevated over the next couple of months, potentially exceeding 2mn tonnes (in October or November), in view of 1) the seasonal peak in palm oil production, 2) the normalization of demand for CPO replenishment following strong previous restocking by major importers India and China, and 3) increased competition from other edible oils, particularly soybean. Overall, this has led to the average CPO price in August trending lower by -3.1% QoQ at RM3,911/MT. Nevertheless, cumulative YTD CPO prices remain steady at RM4,006/MT as compare to RM3,904/MT in previous year, supported by better production and stable global demand for CPO.

Seasonally Higher Production.

CPO production in August continued to improve, reaching 1.89mn tonnes (+2.9% MoM, +8.0% YoY) as the industry entered its seasonal peak production phase, with FFB yield increasing to 1.65 tonnes/ha (+5.8% MoM, +10.0% YoY), and OER rising to 19.68% (+1.2% MoM, - 1.2% YoY). Production is expected to remain elevated, peaking in the 3Q through early November.

CPO Price to Stay Volatile in the Near Term

Moving forward, barring any major unexpected events, we anticipate a moderation in CPO prices in the next couple of months. This is driven by a i) seasonal uptick in FFB production, ii) ample soybean supply forecast for 2024/2025, coupled with the US entering its harvesting season in 3Q2024, iii) a narrower discount/ premium to soybean oil (as of the time of writing, CPO had a slightly premium over soybean at USD7.6/MT, and iv) the strengthening of the ringgit against the US dollar, which could impact export competitiveness and further weigh on demand for palm oil products.

Nevertheless, several key upside risks to our 2024 CPO price outlook are i) higher-thanexpected demand driven by rising consumer goods consumption from major importing countries like India, and ii) prolonged geopolitical tensions.

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. We are cautiously optimistic on plantation companies’ earnings outlook, supported by higher production and stable margin due to anticipated lower fertilizer costs, which may offset other higher operating costs. We reiterate our NEUTRAL call on the plantation sector due to the absence of new notable catalysts. For exposure, we favour IOI (BUY; TP: RM4.50) due to higher FFB output, lower costs, and improved downstream earnings from the oleochemical and specialty fats sub-segments.

Source: BIMB Securities Research - 11 Sept 2024