• Top Picks: IOI Corp (IOI), Ta Ann (TAH), Sarawak Oil Palms (SOP), Golden Agri (GGR), and London Sumatra (LSIP). Malaysia’s October palm oil (PO) stocks rose 5.8% MoM to 2.45m tonnes as output and exports rose 5.9% and 21% MoM. Although production is expected to taper off in the coming months, weakening demand in the export market may be likely given the high stock levels. This could mean that PO stocks would still exceed 2m tonnes – potentially until year’s end at least, in our view. Maintain sector NEUTRAL with a tactically positive trading strategy.

• Recent developments:
  i. The probability of a strong El Nino is at 60% currently, with the median Nino 3.4 Index forecast at 1.9 – according to the Australian Bureau of Meteorology. However, the US National Oceanic & Atmospheric Administration said El Nino conditions have plateaued in mid-October at the level of a moderate El Nino event. According to Indonesia’s weather bureau, rainfall in parts of Sumatra and Kalimantan have already been declining since July, which could result in delayed crop ripening. This could mean that Indonesian production may see 2023’s peak output being delayed to 2024. We note that production in Indonesia has already declined 11.5% MoM in August. Overall, we still expect El Nino to impact productivity more significantly from late 2Q24 onwards, thereby pushing estimated CPO prices higher in 2H24;
  ii. Crude oil prices have fallen 16% in the last four weeks, despite continued geopolitical tensions. As a result, the palm oil-gas oil (POGO) spread has gone back to being negative, thereby reducing chances of discretionary biodiesel demand of 2.5-3m tonnes returning to the market;
  iii. Despite the war, Ukraine’s oilseed crop harvest this year has been very strong – with sunseed output expected to rise 28% YoY in 2023 (Figure 1). Even with the absence of a grains corridor, Ukraine has been able to continue exporting its sunflower oil crops through other channels. Since the beginning of July, exports of Ukrainian sunflower seed oil to the EU rose 31% YoY (Figure 2), causing sunflower oil (SFO) prices to drop >20% over the last six months. This resulted in increased competition with PO, as SFO was priced more attractively. However, this phenomenon reversed in Oct 2023 – CPO price is now at a 5% discount.

• Malaysia’s September PO stocks jumped to 2.45m tonnes (+5.8% MoM) as output and exports grew 5.9% and 21% MoM. The stock/usage (S/U) ratio is now at 13%, above the 15-year historical average of 10%. Although production is set to taper off in the coming months, weakening export market demand may be likely given the high stock levels. This could mean PO stocks still exceed 2m tonnes – potentially until year’s end, at least, in our view.

• Maintain sector NEUTRAL with a tactically positive trading strategy retained. There is no change to our MYR3,900/tonne CPO price assumptions for 2023 and 2024. We also continue to prefer Malaysian vs regional players. Local Top Picks: IOI, SOP, and TAH. Regionally, we like GGR and LSIP.

Source: RHB Securities Research - 14 Nov 2023