Maintain neutral: Malaysia’s palm oil stocks rose 16% (month-on-month [m-o-m]) (+54% year-on-year) to 2.56 million tonnes at end-November, the highest stock level since December 2015 when stocks were at 2.63 million tonnes. This was 2.3% above our and Bloomberg forecasts of 2.5 million tonnes, and 5% above Reuters poll estimate. The higher-than-expected stockpile against our forecast was due to lower-than-expected exports and is near-term negative for the crude palm oil (CPO) price.
CPO production fell 3% m-o-m in November to 1.9 million tonnes due to seasonal effects, it was 4.5% below our forecast due to weaker Sabah estates’ yields. What is more interesting is November’s production was 17% above November 2015’s production (pre-El Nino), suggesting palm tree yields have recovered to pre-El Nino levels. The November 2017 production was the highest monthly output recorded by the country for November.
In the 11-month period in 2017 (11M17), Malaysia’s CPO output rose 14% to 18.1 million tonnes, forming 83% of our 2017 forecast of 19.4 million tonnes.
Palm oil exports fell 12% m-o-m to 1.35 million tonnes in November, a bigger decline compared with our estimate of a 6% m-o-m decline, based on cargo surveyors’ (SGS and ITS) growth estimates. This was due to the move in India to raise import duty from 15% to 30% while that for refined palm oil has been raised from 25% to 40%. In November, the CPO price discount against soybean oil widened to US$165 (RM674.85) per tonne versus October’s discount of US$146 per tonne to reflect higher palm oil supplies.
Our initial estimates reveal that palm oil stocks will increase 8% m-o-m in December to 2.76 million tonnes. We project December’s production to fall 12% m-o-m due to disruptions in harvesting activities from higher-than-usual rainfall as well as seasonal factors, and exports to fall 5% m-o-m due to weaker demand. According to ITS estimates, Malaysian palm oil exports fell 16% in the first 10 days of December versus the same period in November.
Average CPO price for 11M17 rose 6% to RM2,817 per tonne. This is broadly in line with our projection of CPO price to average at RM2,800 per tonne for 2017 and RM2,700 per tonne for 2018. However, we maintain our “neutral” sector rating as we expect CPO prices to remain weak in the near term due to the higher stocks but to recover in the first quarter of 2018 when demand recovers ahead of the Chinese New Year festivities. Upside risks: Higher CPO price and output. Downside risks: Weaker demand for palm oil, slower new plantings. — CIMB Research, Dec 13