Palm oil

Palm oil: Malaysian palm oil inventories rose to an all-time high of 2.83m MT (+7% m/m, +31% y/y) in Oct.

This was led by strong production of 2.04m MT (+4% m/m, +8% y/y), offset partially by higher exports of 1.71m MT (+2% m/m, +6% y/y). Domestic consumption was flattish at 0.21m MT (-28% y/y).

Maybank-KE guides that it is still early to suggest that palm oil stockpile has peaked in Malaysia for the year, as Oct’s relatively low refinery utilization rate at 67% is a possible red flag. The low utilization rate amidst high crop month suggest that Malaysian refiners are losing competitiveness vis-à-vis Indonesian refiners as the latter benefits from the US$20-30/t export tax differentials introduced in Jul.

The onset of Northeast monsoon recently has brought the much needed rain relief. The hotspots and haze in the region are largely gone by now. Yet, tree stress was evident in areas affected by the
recent drought, namely Central and South Kalimantan, and South Sumatra. And this will be manifested in 2016’s production.

Going forward, Maybank-KE is of the view that the Oct’s high stockpile will likely cap the upside of CPO price in the short term. Still, a situational play is building up in the plantation sector as the
present strong El Nino condition has a lag impact on FFB output and is typically positive for CPO price. The house believes that CPO price will start trending higher towards end-Dec ‘15 and into early 2016. CPO price could potentially peak in Mar - May ‘16 with the possibility of hitting RM2,700/t.

In the meantime, the upcoming 3Q15 results may see poor earnings on 1) low CPO ASP, compounded by the punitive US$50/t CPO; 2) export levy imposed in Indonesia since 15 Jul ’15; and iii) forex translation losses on US debt exposure.

The house is Neutral on the sector for now, although investors could position for an El Nino trade in 1H16.

The house ratings on SGX listed CPO stocks are as follows:
- Wilmar (Buy: TP $4.14)
- First Resources (Hold: TP $1.60)
- Bumitama (Hold: TP $0.85)