CGS-CIMB: Palm oil stocks set to continue dropping this month


Malaysian palm oil futures rose nearly 2 percent on Tuesday, hitting their highest in nearly three weeks, as production rose more slowly than expected.

PETALING JAYA: Palm oil stocks are expected to continue to decline in February after falling 6.7% month-on-month (m-o-m) in January on the back of a recovery in exports and higher consumption.

CGS-CIMB Research said it projected Malaysia’s palm oil inventory will fall 5% m-o-m to 2.85mil tonnes at end-February as exports and consumption exceed production.

Palm oil output and exports for February, it said, were expected to fall 15% and 18% m-o-m due to seasonal factors.

On the impact on prices, the research house noted that the average CPO price rose 13.5% m-o-m to RM2,037 per tonne in January 2019, reflecting expectations for inventory to ease.

“We expect the CPO price to trade in the range of RM2,000 to RM2,300 per tonne in February.

“Key events to watch in February are execution of the biodiesel mandate in Malaysia and Indonesia, palm oil exports to India and soybean supplies from Brazil as some of the key regions were impacted by drought,” it said in a note.

The research house maintained its average CPO price forecast of RM2,400 per tonne for 2019 and its “neutral” view on the sector.

The Malaysian Palm Oil Board reported on Monday that palm oil stockpiles had fallen for the first time since May 2018 to 3mil tonnes in Jan 2019, within market expectations.

The lower inventory, it said, was mainly due to a recovery in exports, lower imports and higher domestic use.

Exports rose 21% m-o-m to 1.68mil tonnes in January on the back of stronger demand from key importing countries, resulting in the country’s highest-ever export figure for the month.

CGS-CIMB said this could be partly due to delayed shipments to India to enjoy the lower import duties on palm oil effective January 1, 2018, in addition to Chinese traders stocking up ahead of Chinese New Year in early February.

UOB-Kay Hian Research, which maintained its “market weight” call on the sector, also expects inventory to slide in February, in line with the full implementation of the B10 biodiesel programme effective Feb 1, and the seasonally lower production period in the first quarter.

It said about 761,000 tonnes of palm oil per annum should be consumed under the new biodiesel mandate, doubling from 350,000-360,000 tonnes under the B7 programme.

The research house also expects CPO prices to recover gradually in 2019, with higher prices in 2H19 as inventories are drawn down on the lower production growth expected for the year.

It expects CPO prices to average RM2,350 per tonne this year.

Kenanga Research said it maintained its “neutral” stance on the sector despite expected improvements in CPO prices, in view of “potentially frail February results season” which could pressure planters’ share prices.

It recommends selective positions in TSH Resources Bhd, given its higher earnings sensitivity to CPO price recovery, and status as the only pure upstream planter its coverage that is still profitable at a pre-tax profit level; as well as in Genting Plantations Bhd for its above-average FFB outlook and stable earnings contribution from Johor Premium Outlet and Genting Highlands Premium Outlet, while trading at an undemanding FY19 price earnings ration of 21.0x.

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