Stockpile Fell Below the 2mn Tonne Mark

Malaysia Palm Oil Board (MPOB)’s February 2023 palm oil stockpile fell below the 2mn mark for the first time since August 2023. The stockpile of 1.92mn tonnes (-5.0% MoM, -9.5% YoY) came in within expectations. Production fell to 1.26mn tonnes (-10.2% MoM) while exports also plunged to 1.02mn tonnes (-24.7% MoM). Imports, on the other hand, stood at 32.6k tonnes (+10.4% MoM, -38.0% YoY). Lastly, domestic usage showed an increase of 7.5% MoM to 377.6k tonnes. Overall, we view the MPOB data as neutral for the market.

Production Decline for Fourth Consecutive Month

CPO production declined for the fourth consecutive month to 1.26mn tonnes (-10.2% MoM), which was slightly below the consensus estimate of 1.32mn tonnes. However, on a YoY basis, it remained flattish. The drop in production was in line with the seasonal trend, coupled with shorter working days in conjunction with the Lunar Chinese New Year. In terms of FFB yield, the average FFB yield in Sabah decreased the most by 15.5% MoM to 1.09 tonnes/ha, followed by Sarawak (-

14.9% MoM to 0.97 tonnes/ha) and Peninsular Malaysia (-9.4% MoM to 1.16 tonnes/ha). Meanwhile, the YTD FFB yield increased by 3.1% YoY to 2.33 tonnes/ha. However, it was still below the prepandemic levels of 2.70-2.90 tonnes/ha. YTD production inched up slightly to 2.66mn tonnes (+1.1% YoY). As highlighted before, we expect the low-yielding season to persist until 1Q 2024 before production picking up again in 2Q 2024.

Exports Continue to be Weak

Exports growth remained in the negative territory and contracted by 24.7% MoM to 1.02mn tonnes due to weak demand from major destinations. However, on a YTD basis, total exports increased slightly to 2.37mn tonnes (+4.4% YoY). Looking forward, cargo surveyors, Intertek and Amspec estimated that palm oil exports for the first ten days of March 2024 would increase by 6.77% and 6.24% MoM to 383k and 326k tonnes, respectively.

Inventory to Drop Due to Seasonal Factors

As mentioned previously, inventory is expected to drop in 1Q due to seasonal factors. We expect productions to enter the uptrend cycle in May instead of March this year as the Ramadan festival celebration ends in Apr. Note that the number of workers in Malaysia and Indonesia will reduce significantly during Ramadan, resulting in a decline in palm oil production.

India’s total edible oil stock has declined from the peak of 3.7mn tonnes in Sep 2023 to around 2.6mn as of 1 Feb 2024. India consumes about 22-24mn tonnes of edible oil annually or 1.8mn – 2.0mn tonnes per month. Thus, we believe the restocking activity should take place in the nearterm. However, according to industry experts, India is expected to buy more soybean oil in 2024 due to the negative refining margins in palm oil versus soybean oil and other rival oils, which prompted buyers to switch to soybean oil. As the premium of soy oil futures over palm oil futures has been reduced from its peak of USD803/tonne to around USD127/tonne recently. This may weaken the competitive advantage of palm oil and limit the upside of CPO price to a certain extent, in our view.

While for China, the country’s overall vegetable oil demand is expected to stay slow until April, as it is typically an off-season after the Chinese lunar new year holiday break. Thus, restocking activity may not happen any time soon. We gathered that the soybean stockpiles in China is still relatively high at 5.3mn tonnes as of 1 March, which was far higher than the same period in the past three years. That said, we expect exports to China would not regain any momentum in the near term.

Maintain Underweight

We reiterate our UNDERWEIGHT recommendation for the Plantation sector. No change to our 2024 average CPO price estimate of RM4,000/tonne. We would review our assumptions if South American’s soybean supply turned out lower than the market’s expectation, a more promising demand recovery story and significant reduction in production costs.

Maintain Sell on IOICORP (TP: RM3.79), KLK (TP: RM21.50), FGV (TP: RM1.50) and UMCCA (TP: RM: 4.53) while SIMEPLT (TP: RM4.46) and KIML (TP: RM2.23) remained as HOLD. Willmar is still rated as BUY. Lastly, we downgraded TSH (TP: RM1.14) to SELL from Hold due to limited upside.

Source: TA Research - 12 Mar 2024