Further drop in CPO inventory to support prices over next two months

KUALA LUMPUR: Falling palm oil inventories should help to support crude palm oil prices, which has been hovering near its lowest levels this year.

In a note, PublicInvest research said it sees further weakness in inventory level in the next two months as production is likely to fall from the long holiday break.

However, corporate results in the first quarter of this year are expected to be lacklustre given the poor CPO price performance, which averaged at RM2,008/mt, which was 18.6% lower year-on-year (y-o-y).

"On a positive note, all plantation companies under our coverage showed an increase in 1QCY19 FFB production with Genting Plantations registering the biggest rise, up 14.2% YoY, followed by TSH, 12.6%," said PublicInvest.

In April, palm oil inventory dropped 6.6% month-on-month (m-o-m)to 2.72 million metric tonnes (mt), which was below the market expectation of 2.75 million mt, as production fell and export demand grew. 

Stock/usage ratio dropped from 12.6% to 11.9%.

Malaysian palm oil production dropped 1.4% m-o-m to 1.64 million met due to a 2.8% decline in East Malaysian produiction. 

Palm oil exports meanwhile grew 2% y-o-y to 1.65 million met due to stronger demand from China and India, while the coming Muslim festive celebration also added to demand growth.

Domestic consumption meanwhile fell 21% y-o-y to 2.5 million mt. 

Biodiesel exports saw a sharp drop, down 69% m-o-m, likely constrained by dumping and subsidy allegations from the US and EU. 

"The current palm oil-gas oil spread has expanded to above (-USD130/mt), which is quite attractive for biodiesel production," said PublicInvest.