Bleak 2H19 for palm oil sector as stockpiles set to rise

Weaker export demand and the high production season provide resistance to the recovery of CPO prices


THE outlook on the palm oil sector remains bleak as stockpiles are expected to increase in the second half of 2019 (2H19) on the seasonally higher production cycle and India’s import duties on Malaysian shipments, analysts said.

Malaysia’s palm oil inventory fell for the sixth month in a row to 2.25 million metric tonnes in August, the lowest since July last year, recent data from the Malaysian Palm Oil Board showed.

Exports registered double-digit growth, aided by demand from India due to lower import taxes, providing some relief after local plantation firms registered lower earnings in the second quarter this year on low crude palm oil (CPO) prices.

However, India recently raised its import duty on Malaysian palm oil to curb imports and protect their refiners.

India is the world’s largest importer of vegetable oils and also Malaysia’s largest export destination, comprising about 28% of the country’s total palm oil exports.

Malaysian palm oil exports to India surged by 93.7% in the first nine months of 2019, Hong Leong Investment Bank Bhd said, adding that it expects palm oil inventories to resume uptrend in the coming months.

“We maintain our ‘Underweight’ stance on the sector, given our less optimistic view on the sector’s murky outlook and lofty valuations,” it wrote in a note last Wednesday.

Kenanga Investment Bank Bhd also kept its ‘Underweight’ recommendation on the palm oil industry, with a 2019 CPO price forecast of RM2,000 per metric tonne.

“Increasing production leading up to peak production period in October/ November 2019 and lower exports to India after the import tariff increase are likely to lead to burgeoning stockpiles in the coming months, exerting pressure on CPO prices,” it said.

For September, the research house believes production will grow 8.9% month-on-month (MoM) to 1.98 million metric tonnes as production picks up, while exports should fall 8.2% MoM to 1.59 million metric tonnes.

MIDF Amanah Investment Bank Bhd also expects palm oil stocks to increase going forward on weaker export demand and the high production season, providing resistance to the recovery of CPO prices.

It maintained a negative view on the plantation industry, with an unchanged CPO target price of RM2,090 per metric tonne by the end of 2019.

Meanwhile, BIMB Securities Sdn Bhd expects India, China and the European Union (EU) to “at least maintain their palm oil demand” going forward, despite India’s move to hike import duties on Malaysia.

“The swine fever and US-China trade issues are foreseen to be supportive for palm oil demand in China,” it said, adding that EU’s intake is expected to sustain as the Renewable Energy Directive II regulation caps palm oil use for biofuels in the EU at 2019 levels until 2023, before it’s phased out in 2030.

“Hence, we retain our forecast that Malaysia’s export of palm oil would increase by 6.8% year-on-year to 17.6 million tonnes on continued purchases from India, China and the EU,” BIMB Securities said.

It kept its ‘Underweight’ call on the palm oil industry, noting that most of the companies under its coverage are fully valued and “at risk of further earnings disappointment on weak palm product prices outlook”.

Year-to-date, the Bursa Malaysia Plantation Index was down 0.83%, while the FTSE Bursa Malaysia KLCI declined by 5.22%.