This article first appeared in The Edge Financial Daily on May 15, 2018

Plantation sector
Maintain Neutral: The palm oil inventory declined for the fourth consecutive month, by 6.4% month-on-month (m-o-m) to 2.17 million tonnes (lowest since September 2017), as exports and domestic consumption outpaced production.

Production dipped marginally by 1% m-o-m to 1.56 million tonnes in April 2018 as most states recorded slower production (with the exception of Terengganu and Sarawak). On a year-on-year (y-o-y) basis, production growth eased to 0.6% (versus +7.5% y-o-y in March 2018). Year to date, production rose 9.3% to 6.06 million tonnes mainly due to the absence of a lagged impact from El Nino (recall that palm production was still recovering from the lagged impact from El Nino in early 2017).

Exports declined marginally by 1.5% m-o-m to 1.54 million tonnes in April 2018, as lower exports to India (arising from the lagged impact of higher import duties imposed on palm oil products) were mitigated by higher exports to China (+8.6%), the European Union region (+43.9%) and Pakistan (+22%).

We believe the palm oil inventory will decline further in May 2018, as the seasonal uptrend in production will be more than mitigated by the Malaysian government’s decision to extend the suspension of crude palm oil (CPO) export duty until April 30, 2018 (or until the palm oil inventory falls to 1.6 million tonnes), and restocking activities ahead of Ramadan (beginning from mid-May).

We maintain our average CPO price assumption of RM2,500 per tonne for 2018 and 2019.

We maintain our “neutral” stance on the sector due to the lack of a strong demand catalyst for palm oil. While La Nina and the government’s recent move to suspend CPO export taxes will lend support to near-term CPO prices, these are just short-term catalysts. — Hong Leong Investment Bank Research, May 14