PETALING JAYA: The plantation sector’s bearish supply-demand fundamentals in April will likely persist into May, with Indonesian production and exports anticipated to escalate and pressure crude palm oil (CPO) prices as inventory rises.
In April, CPO production in Malaysia rose to 1.5 million tonnes following a 7% month-on-month (m-o-m) fall in exports to 1.23 million tonnes and lower domestic usage, resulting in local inventory levels rising to 1.74 million tonnes.
“End-inventory of 1.74 million tonnes (2% m-o-m, 16% year-on-year) was 7% higher than consensus and 8% above our estimates.
April average CPO price of RM4,255 per tonne was firm but flat. However, prices are likely to ease in the second quarter as the South American soybean harvest is in full swing and Hari Raya as well as Indian election-related orders have faded,” Kenanga Research stated in a report.
Maybank Investment Bank (Maybank IB) Research noted pressure on CPO price to go lower is building on weaker demand and prospects of higher inventory. Preliminary Malaysian export estimates for shipments in the first 10 days of May revealed weaker exports to destination markets.
“From here, we expect the stockpile to be rebuilt more meaningfully, especially during the peak production months of August to October,” the research outfit stated, adding the two million tonnes stock level could be revisited.
The research house is neutral on the sector with a “buy” call on companies like Sime Darby Plantation Bhd (target price or TP of RM4.96) and Sarawak Oil Palms Bhd
(TP: RM3.18) and “sell” call on TSH Resources Bhd (TP: RM1) and TH Plantations Bhd (TP: 58 sen)RHB Research, which is also neutral on the sector, stated Malaysian CPO producers continue to lose market share to Indonesian producers, especially since Indonesia’s export tax and levies make its CPO more attractive to buyers versus Malaysia’s.
This could prove to be costly for local producers as major buyers have run down stock levels as reflected in the fall in imports by major CPO consumers like India, whose imports fell 18% on-year in the first quarter while China’s imports fell more drastically by 42% in the same period.
