Stock preview and why CPO price is falling
? Malaysia’s palm oil stocks likely rose by 10.5% mom to 1.68m tonnes at endJun 2022F due to higher output and lower exports.
? Indonesia will likely ship out higher-than-usual palm oil exports to clear stocks
in the coming weeks, which will likely put pressure on near-term prices.
? This, coupled with concerns over slower global economic growth, could keep
CPO prices in the RM4,000-5,000 per tonne range in the near term.
Palm oil inventory likely rose by 10.5% mom in Jun 2022
Findings from a survey of planters by the CGS-CIMB Futures team revealed that Malaysia’s
CPO output likely grew by 6.8% mom, but fell 2.9% yoy, to 1.56m tonnes in Jun 2022. The
mom increase was driven by seasonal factors and a lower base in May due to holidays.
Meanwhile, palm oil exports likely fell by 10.4% mom and 14.2% yoy to 1.2m tonnes, based
on export statistics by cargo surveyors Intertek (-10.4% mom), SGS (-7.4%) and Amspec
Malaysia (-13.4% mom). The weaker Malaysia exports were due to higher palm oil exports
from Indonesia after the lifting of its export ban on 23 May 2022, which shifted some palm
oil demand to Indonesia from Malaysia. We estimate Malaysia’s palm oil inventory probably
grew by 10.5% mom and 4.2% yoy in Jun to 1.68m tonnes, due to higher output and lower
exports. This will push the palm oil inventory level to a 7-month high. Our Jun 2022F
forecast palm oil stock level in Malaysia of 1.68m tonnes is 11% below the 10-year historical
Jun average of 1.89m. Official figures will be released on 12 Jul.
Why have CPO prices fallen sharply over the past two weeks?
Spot CPO price in Malaysia has fallen 30% to RM4,698/tonne since Indonesia removed its
export ban on 23 May. The bulk, or 91%, of the price declines occurred since 10 Jun, after
Indonesia provided more clarity on the export process as it replaced the export ban with
the Domestic Market Obligation (DMO). The DMO requires firms to supply a portion of their
products to the domestic market via the government’s bulk cooking oil programme, and
links DMO volumes to their export permits and quotas/rights. Indonesia today said it has
issued export permits for a total of 2.44m tonnes of palm oil from May till 5 Jul. Of this,
1.35m tonnes of permits were for the DMO programme, while 1.09m tonnes were part of
the flush out (FO) programme. Total palm oil exports realised have been 1.66m tonnes
(DMO:0.9m tonnes; FO: 0.76m tonnes) so far. Our estimates suggest that the changes in
export policy throughout 1H22 may have led Indonesia’s palm oil stocks to rise to as high
as 8m-8.5m tonnes at end-Jun 22F (vs. 3.6m tonnes as at end-Dec 21 and 6.1m tonnes at
end-Apr 22). As such, we estimate Indonesia will need to speed up exports over the next
few months to 3m-3.5m tonnes/month to clear stocks ahead of the peak production season.
The government has signaled that it will be facilitating this process to help raise domestic
CPO prices. It has recently changed the DMO ratio to 7x of their domestic sales, from a
previous 5x ratio to help accelerate exports. We are of the view that to clear the excess
stockpile, Indonesia’s palm producers will need to entice buyers by lowering CPO prices
— causing local and international CPO prices to fall significantly in recent weeks. We think
CPO prices could stay weak during the adjustment period and trade at larger discounts
over competing edible oils until Indonesia’s palm oil stocks fall to the 4m-5m tonnes level.
Meanwhile, we expect Malaysia’s palm oil stocks to rise due to competition from Indonesia
palm oil. Maintain Neutral rating, and Wilmar and KLK are our top picks in the sector.