Stockpile Increased Slightly in May

The Malaysia Palm Oil Board (MPOB) announced a second consecutive month of increase in palm oil stockpiles to 1.75mn tonnes in May, which was consistent with market forecasts. Production was robust at 1.70mn tonnes (+13.5% MoM), exceeding expectations. Exports, on the other hand, climbed by 11.7% MoM to 1.38mn tonnes, but was lower than expected. Imports fell by 40.3% MoM, totalling 20.76k tonnes, while domestic consumption increased by 25.2% to 338.09k tonnes.

YTD, the production increased by 9.4% YoY to 7.26mn tonnes, offsetting the increases in exports (+6.7% YoY to 6.3mn tonnes) and domestic consumption (+1.9% YoY to 1.62mn tonnes). Imports have fallen by 62.6% YTD, totalling 139k tonnes. In summary, the MPOB's May data suggests a neutral outlook for the market, given the minimal expansion in stockpiles.

Surge in CPO Production

CPO production surged 13.5% MoM to 1.70mn tonnes, surpassing the consensus forecast, which anticipated a decline to a range between 1.65mn and 1.67mn tonnes. The minor increase confirms our view that production would typically surge after the Hari Raya celebration as harvesting activities pick up. On a YoY basis, production rose by 12.3%, indicating that the recovery path of production is intact.

Meanwhile, we attribute the YTD production increase of 9.4% to 7.26mn tonnes primarily to enhanced harvesting activities, as the past labour shortage issue has been resolved. We foresee further production growth in coming months, in line with the seasonal trend. Most of the plantation companies within our coverage have adequate workers for harvesting FFB and trimming fronds, except for FGV, which still experiences a labour shortage of around 10%.

Stronger Exports in May

Exports rebounded 11.7% MoM to 1.38mn tonnes in May. On a YoY basis, it surged by 27.7%. YTD, total exports have grown by 6.7% YoY to 6.31mn tonnes. Looking ahead, cargo surveyors Intertek and Amspec estimate that palm oil exports for the first ten days of June 2024 will decrease by 20.4% and 21.6% MoM to 295k and 285k tonnes, respectively.

Supply Dynamics Impact

Palm oil production has entered a growth cycle with inventories continue on the rise. Palm oil prices have weakened recently compared to other competing vegetable oils such as soybean oil and sunflower oil, which may suggest a recovery in exports. However, Indonesia has implemented a reduction in palm oil export tariff in June, setting the reference price for CPO in June at USD778.82/tonne, down from USD877.28/tonne in May. This adjustment would reduce the export tax for CPO to USD18/tonne and the levy to USD75/tonne, resulting in a reduction of export costs by USD49/tonne compared to the previous month. We anticipate that this may pose a threat to Malaysian palm oil exports, which are losing the export competitiveness. If the production were to maintain its robust growth momentum, it would lead to resurgent palm oil stockpiles, which would potentially limit the CPO price increase, in our view.

Likewise, according to the May Oil Crops Outlook from the United States Department of Agriculture (USDA), the global soybean production is expected to achieve a new record, reaching 422.3mn tonnes, a significant increase of 25.3mn tonnes from the previous year due to expanded planted areas and average yield improvements. Brazil is anticipating a record-high soybean crop, while Argentina's soybean crop is forecasted to slightly surpass its previous year's output. The analysis indicates that the global soybean ending stocks for 2024/25 are estimated at 128.5mn tonnes, marking a notable increase of 16.7mn tonnes from the previous year. If demand remains stagnant, particularly from major consumer nations, the pressure on the global oilseeds supply may become more pronounced.

As such, we expect the palm oil prices in the coming months to be influenced by both palm oil productions in key producing countries (Malaysia and Indonesia) and weather patterns in the primary soybean-growing regions of Brazil and Argentina.

Maintain Underweight

We reiterate our Neutral recommendation for the Plantation sector. No change to our 2024 average CPO price estimate of RM4,000 per tonne. We would review our assumptions if: 1) South America's soybean supply turns out to be lower than market expectations, 2) a more promising demand recovery story, and 3) significant reductions in production costs.

Maintain BUY on KIML (TP: RM2.50), IOICORP (TP: RM4.39), SDG (TP: RM4.78), TSH (TP: RM1.37) and Wilmar (TP: SGD4.04) while KLK (TP: RM23.83) and UMCCA (TP: RM: 5.38) are still rated as HOLD. Lastly, FGV (TP: RM1.34) remains as SELL.

Source: TA Research - 11 Jun 2024