KUALA LUMPUR (July 15): Crude palm oil (CPO) production in Malaysia is expected to top 20 million tonnes this year.
In a note, UOB Kay Hian Research’s Leow Huey Chuen and Jacquelyn Yow, who had a conference call with Godrej International’s veteran industry analyst Dorab Mistry, said Malaysia’s CPO production is expected to go above 20 million tonnes, while Indonesia should add one to two million tonnes to its 2019 production levels, as yield stress from 2019’s dryness is over.
“The high cycle of Malaysian production had started in March 2020 and is expected to continue all the way till November 2020, while Indonesia’s production is expected to surge strongly in 2H20 (starting from August 2020 to September 2020),” Mistry said.
Mistry added there will be a high palm oil inventory in November. He is expecting Malaysia’s palm oil inventory to be between 2.8 million to 3 million tonnes, with Indonesia’s to be between 8 million to 8.5 million tonnes in November — mainly on account of high production while demand remains weak.
As far as prices are concerned, while not giving a precise forecast, Mistry expects commodity prices to recover in the second quarter of 2021 (2Q21), with higher demand recovery from the hotel, restaurant and catering (HORECA) segment.
Demand is expected to be weak in 2020 as Covid-19 has negatively impacted the HORECA segment. Mistry added the current high vegetable oil import to India is mainly due to replenishment of the current low pipeline.
Mistry said once the pipeline has been replenished, monthly palm oil imports are estimated at 600,000 tonnes — with the country’s vegetable oil demand to be flat year-on-year in 2020 and to normalise in 2Q21.
India’s total import of vegetable oils should come in at between 13 million to 13.5 million tonnes in 2020 (from the 15.5 million tonnes in 2019), and rise back to 15 million to 15.5 million tonnes in 2021.
Furthermore, Mistry expects an increase in domestic vegetable oil demand in India in 2021 to come from domestic production.
Once the pipeline has been replenished, 600,000 tonnes of palm oil a month are expected to be exported to India, as well as 300,000 tonnes of soybean oil and 200,000 tonnes of sunflower oil. Furthermore, Indian imports might be slightly higher in September due to the festive season there.
India’s palm oil consumption is only at 80% of pre-Covid-19 levels and is expected to increase to 90% in 4Q20. Palm oil consumption in the country is expected to normalise only in 1Q21 or 2Q21.
Additionally, Mistry also expects the Indian government to increase import duties on palm oil by 5% to 10% within the next few months — a measure designed to provide additional revenue to the Indian government and also support local vegetable oil produces.
Meanwhile, palm oil demand is still viable in Europe due to tight rapeseed oil supplies and palm oil gaining market share given its status as the cheapest vegetable oil. This is particularly the case in biodiesel, which makes up 50% of total European demand for palm oil.
All in all, Leow and Yow agree that palm oil inventory will rise by 4Q20, but believe that it will not be as high as forecasted by Mistry.
“The key variance between our expectation and Mistry is in production forecast. We are expecting lower production from Malaysia and a marginal increase in Indonesian production for 2020. With the stronger-than-expected 2Q20 production from Malaysia, total production for 2020 could be closer to 19.0 million-19.3 million tonnes vs our forecast of 18.7 million tonnes now,” they said.
The duo have maintained their “market weight” call on the sector as they reckon CPO price recovery would have factored in the recovery of crude oil prices, CPO demand recovery and Indonesia’s B30 biodiesel programme.
Plantation stocks under their coverage are trading at mean or one standard deviation above their five-year mean price to earnings ratio, reflecting the narrow trading band for CPO prices at RM2,100 to RM2,500 a tonne.
Any re-rating has to come from stronger CPO prices, and catalysts for such a move are the substantial improvement in demand or production failing to recover by 2H20.
The research house maintained its CPO price assumptions of RM2,200 and RM2,350 a tonne for 2020 and 2021 respectively.
At 11:06am, palm oil futures contracts for delivery in August were up RM44 to RM2,557 a tonne.