Maintain underweight: Palm oil inventory declined for the 13th consecutive month by 5.3% month-on-month (m-o-m) to 2.25 million tonnes in August 2019, as seasonally higher production was more than mitigated by a 16.4% m-o-m jump in exports. Against consensus, the stockpile came in higher than Bloomberg consensus median estimate of 2.22 million tonnes, due mainly to higher-than-expected production.
Production continued to trend up, increasing by 4.6% m-o-m to 1.82 million tonnes in August 2019. Cumulatively, palm oil production grew 10.8% to 13.35 million tonnes in the nine months of 2019 (9M19), driven mainly by estates in Peninsular Malaysia, attributed mainly by a pickup in oil yield, which we believe was due to absence of lagged impact from El Nino.
Exports increased for the third consecutive month, by 16.4% m-o-m to 1.73 million tonnes in August 2019, boosted mainly by higher exports of crude and processed palm oil. We note the strong m-o-m export growth was driven by China (+237.4%), India (+22.6%) and Pakistan (+31.3%), which was in turn due to: i) restocking activities ahead of the Diwali festival; ii) increased restocking activities by Indian importers ahead of the country’s import duty hike; and iii) Malaysian palm’s better price competitiveness against its Indonesian peers due to the ringgit depreciation in August 2019.
Both cargo surveyors (AmSpec Agri and Intertek) indicated that palm oil exports declined by 12-14.9% m-o-m during the first 10 days of September 2019.
We maintain our view that palm oil stockpile will resume its uptrend in the coming months, mainly on the back of the commencement of the seasonally higher production cycle, which typically commences in July and peaks around September and October, and the Indian government’s recent move to hike import duty on processed palm oil from Malaysia, by five percentage points to 50%. The hike eliminated Malaysian refiners’ price competitiveness against their regional peers, hence dragging exports of processed palm oil from Malaysia to India. We note that India is Malaysia’s largest palm oil export destination, accounting for 28% of the latter’s total palm oil exports. Exports of Malaysian palm oil to India have surged by 93.7% in 9M19. We are maintaining our average crude palm oil price assumptions of RM2,100 a tonne for 2019 and RM2,200 a tonne for 2020.
We maintain our “underweight” stance on the sector, given our less optimistic view on the sector’s murky outlook and pricey valuations. — Hong Leong Investment Bank Research, Sept 11