Palm oil inventory to rebound on higher production

By NUR HAZIQAH A MALEK / Pic TMR

MALAYSIA’S palm oil inventories are expected to show further improvement after rising to their highest level in four months as production rallied the most since 2015.

Local palm oil stockpile increased by 10.7% month-on-month to 1.45 million metric tonnes (MT) in March 2021, driven by higher crude palm oil (CPO) production and imports.

The figure, however, represents a 16.3% year-on-year decline on the back of lower opening stock of 1.32 million MT.

MIDF Amanah Investment Bank Bhd in a note yesterday attributed the higher stockpile to low stocks and restocking activities by buyers like India ahead of Ramadhan.

“Moving forward, we anticipate export demand will recover on the back of gradual recovery of economic activities in India and China.

“On top of that, we posit that demand from China will increase in the coming months as the country had recently approved new standards for premium palm oil,” it stated.

The research firm expects inventory levels to stay below the two million level in the immediate term in view of the slower production period.

However, it expects stockpiles to show improvement further down on the back of a production recovery amid higher production cycles.

MIDF maintained its ‘Positive’ rating on the sector, with CPO price expected to stay at the RM3,000 level in the first half of 2021 (1H21).

“Moving forward, we believe the CPO price will stay at the RM3,000 level in 1H21 due to anticipated supply tightness and the attractiveness of CPO price compared to other edible oils such as soybean oils.

“We presume CPO price will ease in 2H21 due to better production level as a result of rainfall which should boost palm oil fruit yields,” it said.

MIDF anticipates tight soybean supply, especially from Argentina, to lead to stronger soybean prices which should drive CPO selling price higher.

“The subdued inventory level of palm oil in Malaysia would also act as a catalyst to CPO price,” it stated.

While the inventory is expected to stay below the two million tonnes level on a slower production period, production is expected to recover in 2H21 though below potential due to the nation’s dependency on foreign workers.

Public Investment Bank Bhd (PublicInvest) maintained its ‘Neutral’ call for the sector, noting the sector had seen the steepest pro-duction growth in five years, as CPO production snapped upwards after six straight monthly declines.

“The strong growth was mainly driven by the European Union (46.1%), India (42%) and Pakistan (158.6%), which were partly offset by China (13.1%) and the US (49.8%),” it stated.

PublicInvest expects the impact of Sri Lanka’s palm oil import bank to be minimal as the country made up only 0.7% of total palm oil exports in 2020.

Sri Lanka recently banned import of palm oil with immediate effect and ordered local plantation companies to uproot 10% of their trees and replace them with rubber trees or other environmentally friendly crops.

Hong Leong Investment Bank Bhd (HLIB) expects Malaysia’s stockpile to remain in the coming months due to labour shortage.

“Additionally, higher palm oil demand from China on seasonal factors and resurgence of African swine flu and low edible oil stockpile in India will likely drive restocking activities in India,” it noted.

The research house maintained its recently revised CPO price assumptions of RM3,200 per MT for 2021 and RM2,800 per MT for 2022 to 2023.

“We believe CPO price will remain elevated at above RM3,500 per MT mark in the second quarter of 2021 and trend down more noticeably in 2H21, on the back of better soybean supply outlook, seasonally stronger palm oil output in 2H21.

“We believe a pullback in demand, which will pull prices of edible oil downwards, when supply recovery kicks in,” it said.

The research house also maintained its ‘Neutral’ rating on the sector as it believes that currently high CPO price will not sustain in the long term.

HLIB’s top picks for the sector are IOI Corp Bhd, Kuala Lumpur Kepong Bhd, IJM Plantations Bhd and TSH Resources Bhd.