CPO price could fall on higher supply in 2H
? Malaysian palm oil stock fell 7% mom to 1.52m tonnes as at end-May due to
higher exports — within expectations; neutral for CPO price.
? Indonesia’s resumption of palm oil exports in Jun could dampen export
volumes from Malaysia.
? We project palm oil stock to rise by 5% by end-Jun 2022F and CPO price to
trend lower in 2H22F due to improved edible oil supplies. Reiterate Neutral.
7% mom decline in May’s palm oil stock in line with expectation
Malaysia’s palm oil stock fell 7% mom and 3% yoy to 1.52m tonnes in May 2022 on higher
exports. The stock level was 0.6% below our forecast of 1.53m tonnes and 1.3% below
Reuters’ poll estimate of 1.54m tonnes, but 0.6% above Bloomberg consensus’ forecast of
1.51m tonnes. The palm oil inventory in Malaysia remained tight as at end-May, at 19%
below its historical 10-year average May stock level of 1.88m tonnes. Overall, we expect
this news to be neutral for CPO price as the stats were broadly in line with expectations.
Weak output due to lower harvesting days and labour shortfall
CPO output fell 0.1% mom and 7% yoy to 1.46m tonnes in May 2022, as workers’
productivity was impacted by the foreign workers shortage and fewer harvesting days, due
mainly to the Hari Raya celebrations during 2-3 May. We gather that planters are likely to
receive new foreign workers starting end-Jun to alleviate their labour shortage, which could
partially ease the labour shortage issue. Palm oil output for 5M22 fell 0.4% yoy to 6.7m
tonnes, which is behind our forecasts for Malaysia’s CPO production for 2022F (+4% to
18.9m tonnes).
Strong palm oil exports in May due to Indonesia’s export ban
Palm oil exports increased 27% mom and 7% yoy to 1.34m tonnes in May. The higher
exports are driven mainly by Indonesia’s decision to ban palm oil exports from 28 Apr to 23
May 2022. This shifted palm oil demand from Indonesia to Malaysia. However, the palm oil
trade flows could shift back to Indonesia in Jun as the Indonesian government has issued
383 export permits to ship 460,647 tonnes of palm oil this month and introduced a palm oil
export accelerating programme of up to 1m tonnes of palm oil.
Higher palm oil supply likely to lower CPO price in 2H22F
We project palm oil stock to rise by 5.1% mom to 1.6m tonnes by end-Jun 2022F, on higher
output (+5.3% mom) and lower exports (-5% mom). We believe CPO prices could trade in
the range of RM5,500-6,500 per tonne in Jun 2022F due to the uncertain export supply of
sunflower oil from Ukraine and lower-than-usual palm oil export supply from Indonesia, as
the Indonesian government tweaks its export policies on palm oil to secure domestic
cooking oil supply. We maintain our average CPO price forecasts for 2022F/2023F at
RM5,600/RM3,800 per tonne. We believe weaker 2H22F CPO prices, coupled with higher
operating costs due to the hike in the minimum wage in Malaysia to RM1,500 per month
effective 1 May 2022, higher fertiliser costs, as well as the windfall/Cukai Makmur tax will
lead to lower profit margins in 2H22F unless productivity improves. We keep our Neutral
rating as sector P/E valuations of 12.8x for FY22F, coupled with dividend yields of 4.3%, is
supportive of planters share price.