PLANTATION

UOB Kay Hian Malaysia Research Underweight

IN February, Malaysia’s palm oil inventory declined 2.8% month-on-month (m-o-m) to 2.48 million tonnes (+69.8% year-on-year). UOB Kay Hian Malaysia Research said the decrease was mainly due to lower production of crude palm oil (CPO) due to fewer harvesting days.

However, the research house said that the inventory of 2.48 million tonnes was higher than market expectations of 2.39 million tonnes.

It expects CPO production to increase m-o-m in March on more harvesting days. CPO production is also likely to improve y-o-y this month as the lagged impact from the severe drought tapers off while fresh fruit bunches (FFB) production is expected to normalise from the second quarter this year.

CPO production is expected to fully recover from the 2015 El Nino impact by end-2Q18.

In February, CPO exports rose 65.2% m-o-m and more than 100% y-o-y after Malaysia decided to suspend the export duty at the expense of lower processed palm oil exports (-31.7% m-o-m, -11.0% y-o-y).

However, UOB said CPO exports could drop in the next two to three months after India raised import duty.

India is the largest palm oil importer and about 18% of Malaysia’s palm oil exports in January-February went to India.

UOB said China’s palm oil imports could slow down due to high inventory levels.

As of March 2, 2017, China’s palm oil inventory was 731,400 tonnes, or 1.4-1.6 months of consumption, rising 9.6% from end-2017 inventory of 667,200 tonnes.

UOB said it maintained an “underweight” on the plantation sector saying there would be significant CPO price weakness going into 2018 as palm oil is likely to see an oversupply by mid-2018.

It has a “sell” call on counters such as Sime Darby Plantation, IOI Corp and TH Plantations.

UOB said it reckons that CPO prices could trend at RM2,400-RM2,700 per tonne in February-April.