Malaysia end-February palm oil inventory higher than expected

KUCHING: Malaysia’s end-February 2018 palm oil inventory level of 2.48 million metric tonnes (MT) was higher than analysts expected, while others noted that stocks declined less than projected during the month.

According to the research arm of MIDF Amanah Investment Bank Bhd ( MIDF Research), Malaysia palm oil inventory level of 2.48 million MT as of end-February was higher than its and market expectation of 2.35 million to 2.37 million MT.

February 2018 stocks also declined less than the research arm of Kenanga Investment Bank Bhd (Kenanga Research) expected, at three per cent month on month (m-o-m), compared to consensus’ expected 2.37 million MT and its 2.39 million MT.

Although production decline at 1.34 million MT was even lower than consensus and Kenanga Research’s 1.4 million MT, exports declined commensurately to 1.31 million MT, near to consensus’ 1.33 million MT and the research arm’s estimated 1.32 million MT.

Export came in weaker than MIDF Research expected with 13 per cent decline m-o-m as China slowed down their purchases after Chinese New Year.

As per the Malaysian Palm Oil Board’s latest statistics, export to China declined 33 per cent m-o-m to 104,962 MT.

“We believe that China has slow down their purchases of palm oil after the pre-stocking activity ahead of Chinese New Year,” it said.

Moving forward, MIDF Research expected March export to improve eight per cent m-o-m due to the longer calendar month effect.

Meanwhile, Kenanga Research expected the surprise hike in Indian palm oil import duties earlier this month to have a similar dampening effect on Indian demand, as seen in the previous tariff hike in midNovember 2017.

“Exports to India plunged 40 per cent to 100,000 MT for that month,” the research arm said.

The research arm expected a similar quantum of decline to be seen in March 2018 given recent reports of Indian buyers cancelling shipments.

“Nevertheless, with abundant supplies coming on-stream, we think shipments to other regions should remain supportive.

“Thus, we expect March 2018 exports to improve three per cent to 1.35 million MT.”

As imports and local usage normalises, Kenanga Research estimated supply at 1.61 million MT to be marginally higher than demand at 1.59 million MT, resulting in a slight increase in March 2018 stocks of one per cent to 2.5 million MT.

“Production should surge with higher harvesting days, by 17 per cent to 1.57 million MT.”

As for MIDF Research, it expected March production to increase by 12 per cent m-o-m but only three per cent year on year y-o-y to 1.5 million MT.

The research arm expected an increase of 12 per cent to 1.5 million MT due to seasonal factors. Overall, Kenanga Research expected stocks to rise one per cent to 2.5 million MT.

From a price perspective, with stock levels likely to rise on the back of a production uptrend, the research arm expected crude palm oil ( CPO) prices to see headwinds ahead, more so with stock levels disappointing on the high side in February 2018.

With futures prices adjusting downward ye s t e rday on disappointing stocks, Kenanga Research continued to expect a downtrend in CPO prices in the second quarter ( 2Q) to 3Q of 2018 ( 3Q18).

Kenanga Research’s FY18 price forecast of RM2,400 per MT remained intact. However, the research arm tweaked its shortterm CPO price range slightly lower to RM2,200 to RM2,500 per MT, from RM2,200 to RM2,550 per MT, on an unchanged soybean oil ( SBO) discount of US$ 60 per MT and crude oil premium of US$ 100 per MT.

“Despite the bearish price prospect, we think plantation companies should see reasonable margins as our forecasted CPO price remains well above the per- ton production cost of an efficient planter ( circa RM1,400 per MT) - particularly in a rising production environment.

“Nevertheless, with the market tendency to underweigh plantation stocks in a declining CPO price environment, we maintain our overall neutral outlook on the sector.”

MIDF Research was also slightly negative on the CPO price as the latest inventory data came in above market expectation.

However, the research arm believed that demand should improve from April onwards as the winter has ended in the Northern Hemisphere.

“This should lead to higher usage of palm oil,” it said.

All in, MIDF Research reiterated its positive view on the sector due to improved demand outlook for palm oil in 2018.

The research arm believed that the good global economy growth in 2018 should lead to higher consumption per capita.

“On the supply side, consensus estimate of huge supply growth may not be fully realized due to ongoing labor shortage and the potentially high replanting activity in Indonesia. "