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Peak output hit by worker shortage issue

  • Malaysian palm oil stocks fell more than expected to 1.75m tonnes as at end- Sep 2021. This tighter-than-expected stock level is positive for CPO prices.
  • We project stocks to fall marginally in Oct as production remains subdued.
  • There is potential upside to our 2021F CPO price of RM3,700 per tonne as CPO prices had averaged RM4,207 per tonne in 9M21.
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Stocks fell 7% mom to 1.75m tonnes at end-Sep, below estimates

Malaysia’s palm oil stocks fell 7% mom to 1.75m tonnes as at end-Sep 2021 as production fell mom, while exports grew significantly mom. This was 4% below our forecast of 1.83m tonnes (as per our stock preview note on 4 Oct 2021). It was also 6% below Bloomberg consensus forecast and Reuters’ poll estimate of 1.87m tonnes. The inventory was lower than expected due to lower-than-expected output combined with higher local usage. The 7% mom fall in inventory is in contrast to the historical trend for Malaysian palm oil stocks in Sep (+3.3% mom on average over the past 10 years) due to the planters’ inability to optimise palm oil supplies owing to insufficient workers.

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Seasonal production peak in Sep impacted by labour shortages

CPO output fell 0.4% mom and 9% yoy to 1.7m tonnes in Sep 2021. The mom decline was a divergent from the historical 10-year average of a 3.3% mom rise in Sep output, due to acute labour shortage. 9M21 output fell 9% yoy to 13.3m tonnes, below expectations, making up 71% of our 2021F CPO production forecast of 18.6m tonnes (-2.8% yoy). We attribute the inability of Malaysian planters to lift output in Sep to the tight labour situation as Malaysia has banned the intake of foreign workers since Mar 2020. The government recently indicated that it will allow the recruitment of 32,000 foreign workers for plantation estates but we suspect this will take time to materialise due to the requirements to get relevant approvals from various authorities for foreign workers to enter Malaysia.

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Higher exports due to festive demand and low domestic supplies

Palm oil exports grew 37% mom but fell 0.9% yoy to 1.6m tonnes in Sep 2021, due mainly to stronger demand from China, India, EU and the US. We attribute the higher exports to stronger buying by Indian traders, following the Indian government’s 11 Sep decision to lower the effective import duty on edible oils by 5.5-9.5% pts. The stronger exports were due to higher demand ahead of the Diwali season, lower domestic supplies in key consuming countries, and tight supplies of edible oil substitutes.

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Stocks may have peaked in Aug, supplies to stay tight rest of 2021F

We project palm oil stocks to fall 0.8% mom to 1.73m tonnes by end-Oct 2021F, with output up 1.5% and exports down 4% mom. We project CPO prices to remain firm at RM3,500 – 4,500 per tonne in Oct 2021F, amid tight near-term global edible oil inventories and our expectation that palm oil supply in Malaysia will remain below potential for the rest of the year as the worker shortage issue is unlikely to be resolved soon. Maintain sector Neutral. We keep our 2021F/2022F/2023F CPO price forecasts of RM3,700/RM2,900/RM2,800 per tonne, but see upside potential due to disappointing global edible oil supplies.