[SECTOR UPDATE: Plantation – Malaysia]
Malaysia Palm Oil Board (MPOB) reported palm oil
inventory jumped to 2.4m tonnes as of end-Sep 19, within market expectations. Palm oil inventory level hit a five-month high on lower exports and CPO production.
Decreased exports to China and India:
Palm oil exports were at approximately 1.29m tonnes in Sep 19, in line with market expectations, on lower exports to China and India. We believe exports to China have normalised from a higher base in Aug 19 (due to festive demand). Exports to India fell as Malaysia no longer enjoys the 4% lower import duty for refined palm oil and the current import duty is now on a par with other countries’ at 50%.
Productions came in lower at 1.80m tonnes in Sep 19, vs market expectations of 1.90m tonnes. The drop came mainly in the last two weeks of September when the haze was at the worst situation. A lack of sunshine has led to a slower ripening process, thus less FFB were harvested towards end-Sep 19.
CPO prices should have bottomed and downside risk is offset by improving soybean prices and high crude oil prices. We also foresee the palm oil oversupply to ease leading up to 4Q19-2020. However, the recent price recovery is relatively muted for Malaysia-based plantation companies as production growth is expected to be flat or just marginally higher yoy for 2019. We are expecting slower production growth in 2H19. On the cost side, the higher minimum wage will not be fully offset by the marginal increase in production. Companies with higher contributions from downstream should be able to mitigate the price impact. Among companies under our coverage, IOI Corporation had a higher downstream contribution at 50% of its FY19 operating profit.
Drier weather and haze affect production. The dry weather since Jul 19 and the haze since early-Sep 19 could affect production for 1Q20. A lack of sunshine has led to a delay in the ripening process which could affect the oil extraction rate as well.
Expect production to peak in Oct 19:
CPO production could peak in Oct 19 but likely to be lower. However, we expect the peak production for 2019 may not be as high as in the past due to the lack of fertiliser application since 2H18 and the drier weather over the last 2-3 months.
Flat or lower exports in Oct 19:
We opine that exports would come in flat or lower yoy in Oct 19 as the Northern Hemisphere enters the winter season where palm oil tends to crystallise in the lower temperature.
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