Plantation - Inventory Restocking Has Begun
- Malaysia’s CPO output recovered by 16.3% MoM and 20.1% YoY in March. This led to the country’s inventory rising 6.5% MoM to 1.55m tonnes in March.
- We believe this is the beginning of the CPO inventory replenishment cycle, which we expect to come about as CPO productivity improves and demand remains lacklustre.
- We keep our UNDERWEIGHT rating on the sector across the region. Our top SELL is Lonsum, while our top BUY is Sime Darby. In Malaysia, IOI Corp is our top SELL.
- Key risks include weather extremities and a change in the demand dynamics.
Malaysia’s CPO production rose 16.3% MoM in March, but was up 20.1% YoY.
- On a YTD basis, production climbed 17.9% YoY. We expect Malaysia’s CPO output to post a 10-12% growth YoY in 2017.
Exports rose 14.3% MoM
- Exports rose 14.3% MoM in March (after a short February) but decreased 5.3% YoY. Exports to China rose 24.8% YoY but this was offset by a 42% YoY decline to India and a 31.4% decline to US and a 18.7% decline to the EU. We believe exports would continue to be under pressure in 2017 from environmental issues in the EU, a strong domestic crop in India and higher soybean reserves being crushed in China.
Inventory rose 6.5% MoM
- Inventory rose 6.5% MoM to 1.554m tonnes in March. We believe this is the start of the rise of inventory levels, as production levels recover in a more significant manner.
- Stock/usage ratios are now at 9% (from 8.5% in Feb), still slightly lower than the 15-year average of 9.5%, but are on a declining trend.
- The European Parliament passed a non-binding resolution to urge the European Commission to phase out the use of vegetable oils for biofuels by 2020. This would be negative, if it was implemented. 46% of palm oil used in Europe in 2016 (or 3.5m tonnes) was used as a biodiesel by automobiles;
- The Indonesian Government has changed the pricing formula for biodiesel to CPO price plus USD100/tonne (from USD125/tonne), which takes effect in May. We estimate this would only fund an additional 0.2m tonnes of biodiesel output to a maximum of 2.44m tonnes – which is still far from the 4.4m target for 2017;
- The US Department of Agriculture (USDA) announced planting intentions for soybeans for 2017 – an increase of 7% of soybean acreage and a 4% decline in corn acreage. This means more soybean crop coming into the market in the US from Sep 2017 onwards, implying an estimated +10.4% YoY increase in 2017.
- We continue to believe CPO prices would be on a downtrend going forward, given the abundant supply coming into the market in 2H17, as well as the fourth bumper crop of soybeans coming out of South America from April onwards.
- We maintain our UNDERWEIGHT sector rating.
- Regionally, our top SELL is London Sumatra (Lonsum) while our top BUY is Sime Darby.