Stocks preview and supply squeeze issue
? Malaysia’s palm oil stocks likely fell by 1.2% mom to 1.56m tonnes at endJan 2022F due to weaker output.
? Recent export rule for palm oil in Indonesia, drought in South America, delays in foreign worker intake in Malaysia have led to a tight squeeze in palm oil.
? This coupled with the low production season for palm oil in 1Q22F are key reasons behind the surge in CPO prices – short-term positive for planters.
Palm oil inventory likely fell by 1% mom in Jan 2022
Findings from a survey of palm oil areas by the CGS-CIMB Futures team revealed that Malaysia’s CPO output likely fell 14.1% mom, but grew 10.6% yoy, to 1.25m tonnes in Jan 2022. Meanwhile, palm oil exports likely fell 27% mom but rose 9.3% yoy to 1.04m tonnes, based on export statistics by cargo surveyors Intertek Testing Services (ITS, -25.6% mom), SGS (-27.08% mom) and Amspec Malaysia (-25.86% mom). We estimate that Malaysia’s palm oil inventory probably fell 1% mom, but grew 18% yoy, to 1.56m tonnes at end-Jan 2022F. The likely mom drop in stock level is lower compared to historical trends in Malaysia’s Jan palm oil stock movements (average: -6% mom over the past 10 years). Our forecast palm oil stock level in Malaysia for Jan 2022F of 1.56m tonnes is 31% below the 10-year historical Jan average of 2.08m tonnes. Official figures will be released on 10 Feb.
Indonesia’s new export ruling worsening palm oil supply squeeze
Spot CPO price in Malaysia rose 4.5% to a new high of RM5,744 per tonne on 4 Feb, after Indonesia announced on 27 Jan new export rules for Indonesia palm oil. This is because the new rules could delay the exports of palm oil from Indonesia as palm oil exporters scrambled to satisfy the new ruling of selling 20% of their planned palm oil exports in the local cooking oil market at a maximum market price of Rp9,300/kg for CPO (at 38% below market price for CPO of Rp14,970/kg as at 4 Feb 2022). Based on the latest ASPs for Indonesia and Malaysia, it would appear that the bulk of the costs to subsidise the domestic cooking oil market in Indonesia may have been currently borne by importers of palm oil via higher international CPO price. This is because Indonesia’s CPO price has declined by only 1% (against Malaysia’s rise of 5%) since Indonesia announced that it will make it mandatory for palm oil producers to sell 20% of their palm oil exports domestically. On 7 Feb 2022, Indonesian trade ministry said it has issued permits for 6 companies to export a total of 310,000 tonnes of crude palm oil and 18,178 tonnes of palm olein. This represents only 20% of total exports of 1.6m tonnes for CPO and processed palm oil in Feb 2021.
Other issues squeezing global edible oil supplies
The other factors that are pushing CPO prices higher in Feb are the unresolved acute labour shortage issue in Malaysia and concerns over South America drought which is likely to reduce Brazil’s soybean output. However, the high CPO prices will likely cause demand destruction in the food and fuel markets. Thailand temporarily cut its biodiesel mandate from 7% to 5% from 5 Feb to 31 March. The recent rally in CPO price will benefit upstream palm oil players with estates in Malaysia and appears neutral for upstream palm oil players with estates in Indonesia currently. There is upside to our projected average CPO price of RM3,600 per tonne in 2022F as we had expected a faster resolution to the labour issue and had not projected Indonesia’s move to regulate domestic cooking oil through export rules. We reiterate our sector Neutral call for Malaysian planters as concerns over ESG are partly offset by strong earnings and undemanding valuations of the sector vs. historical averages. Singapore and Indonesian planters offer cheaper valuations.