Higher Exports In May With The Absence Of Indonesia Palm Oil Exports
Apr 22 Malaysia palm oil inventory came in slightly higher than market expectations,
mainly due to lower-than-expected exports. We expect Malaysia’s palm oil inventory
level to be lower mom in May 22 mainly due to a jump in palm oil exports and lower
mom production in May. Maintain MARKET WEIGHT. Top picks: Hap Seng Plantations
and IOI Corporation.
WHAT’S NEW
• Inventory slightly higher than market expectations. As at end-Apr 22, the Malaysian
Palm Oil Board (MPOB) reported palm oil inventory at 1.64m tonnes, slightly higher than
market expectations. The variance was mainly due to the lower-than-expected exports which
came in at only 1.05m tonnes in Apr 22 vs market expectation of 1.10m-1.20m tonnes.
• The lower palm oil exports came in within our expectations where we had previously
highlighted that we expect Malaysia’s palm oil exports to be lower in Apr 22 as Indonesia will
recapture the exports market share for refined palm products after the removal of Domestic
Market Obligation (DMO) on 20 Mar 22. Having said that, we expect Malaysia palm oil
exports to see a sharp increase with the Indonesian government banning palm oil exports.
• Prices weaken despite supplies remaining tight. Despite supply tightness, agri
commodity prices trended down over the last two weeks, largely driven by: a) concern of
demand weakening due to high prices, b) the potential reduction in biodiesel mandate in the
EU to increase vegoil supplies for food use, and c) the expectation that Indonesia will lift the
exports ban as early as next week as production recovery in April and May is strong and
Indonesia could run out of storage space if the ban prolongs.
• In our view, as long the Indonesia retail price for cooking oil refuse to come down to the level
closer to Rp14,000/litre the ban likely to stay. Based on our checks the bulk cooking oil
(minyak goring curah) still selling hovering around between Rp14,500-16,500/litre.
ACTION
• Maintain MARKET WEIGHT. We believe CPO prices may sustain at these levels in 1H22
due to short-term supply disruption. We maintain MARKET WEIGHT and expect Malaysian
pure upstream players to benefit the most, leveraging on the high CPO prices.
• Our top pick would still be Hap Seng Plantation (HAPL MK/BUY/Target: RM3.15), who
will benefit the most as it only sells in the spot market with better CPO ASP as compared
with peers, thanks to their sustainability certifications.
• For big caps, we prefer IOI Corporation (IOI MK/BUY/Target: RM5.15) as it has the
highest Malaysia exposure as well as higher refining margin as compared with other big
cap plantation companies. We take this opportunity to upgrade IOI Corporation from
HOLD to BUY due to the recent share price weakness.
ESSENTIALS
• Outlook for May 22. We think that Malaysia’s palm oil inventory level would be lower mom
in May 22, mainly due to:
a) Jump in palm oil exports. With the absence of Indonesian palm oil exports, we expect
Malaysia’s palm oil exports to see a huge mom jump in May 22 with buyers diverting to
Malaysia for their raw materials. On top of that, we reckon that the stickiness of buyers
would remain with Malaysia due to the high frequency of changes in Indonesia’s policies.
b) Lower production in May 22. Palm oil production in May 22 is expected to be lower
mom due to fewer working days. Operations were closed due to four days of public
holidays in conjunction of Labour Day and Hari Raya.
• Malaysia may cut palm oil export tax amid global supply crisis. Malaysia is considering
cutting its export tax on palm oil from the current 8% to 4-6% and plans to slow the
implementation of its biodiesel mandate to help meet global demand amid an edible oil
shortage. The minister of plantation industries and commodities mentioned that the cut would
likely to be temporary and the decision could be made as early as Jun 22. We think that
Malaysia is:
a) Taking opportunity… We believe Malaysia is taking the opportunity arising from
Indonesia’s ban on exports to maximise its exports, where Malaysia is the current major
global palm oil export player.
b) …but might want to focus on production. We think the Malaysian government might
need to focus more on domestic palm oil production where our palm oil production has
not been doing great due to the ongoing labour shortage. In our view, it would be more
critical to bring in labour to catch up the harvesting round and productivity for Malaysia
planters during the period when CPO prices are high.
ASSUMPTION CHANGES
• CPO ASP assumptions. We had revised our CPO assumptions to RM5,200/tonne and
RM4,000/tonne (previous: RM4,200/tonne and RM3,000/tonne) for 2022-23 respectively. We
only factored in our higher CPO assumption for Hap Seng Plantations and will eventually
reflect accordingly in all of our coverage during this results season.
SECTOR CATALYSTS
• Lower-than-expected global vegoil supply due to the impact of La Nina.
• Stronger-than-expected commodity cycle.
• US green diesel demand.