Impact of India’s refined CPO import policy may not be significant

This article first appeared in The Edge Financial Daily, on January 14, 2020.
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Plantation sector
Maintain overweight:
It was a dramatic finish for the plantation sector in 2019 after seeing a strong comeback for the crude palm oil (CPO) prices in the fourth quarter following a poor run of performance in the first seven months. For the year, CPO prices rallied 44% to finish at a three-year high of RM3,052 per tonne, bringing an average price of RM2,124 per tonne.

Meanwhile, palm oil inventories ended the year at two million tonnes, the lowest level since August 2017. For 2020, we have a higher CPO price assumption of RM2,600 per tonne and our three top picks are Sarawak Plantation Bhd, Ta Ann Holdings Bhd and TSH Resources Bhd.

In contrast to market expectations of 2.07 million tonnes, palm oil inventories were down by 11% month-on-month (m-o-m) and 38% year-on-year (y-o-y) to 2.01 million tonnes as output weakened to an 18-month low and exports were slightly better than anticipated.

The steeper-than-expected drop brought the year-end inventories to the lowest level since August 2017. We expect to see the Malaysian inventory level fall below 1.8 million tonnes in the next two months. Meanwhile, the stock usage ratio dropped from 11% to 9.8%.

Palm oil exports in December saw a marginal change of 0.7% lower m-o-m and 0.9% higher y-o-y to 1.39 million tonnes as softer monthly demand from China (down 24.6%), the European Union (EU) (down 18.7%), India (down 2.9%), Pakistan (down 0.3%) was offset by stronger exports to the US (up 101.9%) and others (up 15%).

For the full year, palm oil exports rose 12% y-o-y to 18.4 million tonnes, bolstered by stronger demand from China (up 33.9%) and EU (up 9.5%) and the largest buyer, India (up 75.4%).

Malaysian palm oil production saw a third straight decline of 13.3% m-o-m and 26.2% y-o-y to 1.3 million tonnes, the lowest level since June 2018. For the full year, it rose 1.8% to 19.8 million tonnes.

The Indian government has amended its import policy from “free to restricted” for refined CPO, which means importers will be required to obtain a licence or permission for inbound shipment.

The move is seen as discouraging refined palm oil imports from Malaysia as the Indian government tends to support its domestic refining industry by switching to Indonesian CPO. We think the impact is not significantly negative as Indian buyers have traditionally been a bigger buyer of CPO, which accounts for about 70% of its total imports. — PublicInvest Research, Jan 13