Prices falling on expectation of higher stocks
- Malaysian palm oil stocks rose 9% mom to 1.66m tonnes as at end-Jun 2022 due to higher output and lower exports — within expectations.
- We project palm oil stocks to rise by 21.4% mom to 2m tonnes by end-Jul 2022F due to increasing competition from Indonesian exports.
- We expect pure upstream Malaysian planters to post flat to higher sequential profits in 2Q22F while those with Indonesia exposure may see weaker profits.
Malaysia palm oil stocks starting to build in Jun
Malaysia’s palm oil stocks increased 9% mom and 3% yoy to a 7-month high of 1.66m tonnes in Jun 2022, on higher output and lower exports. The stock level was 1.2% below our forecast of 1.68m tonnes and 2.9% below Reuters’ poll estimate of 1.71m tonnes and 3.5% below Bloomberg consensus’ forecast of 1.72m tonnes. The palm oil inventory for Jun 2022 is 11% below the historical 10-year average Jun stock level of 1.85m tonnes.
Stronger output mom due to higher harvesting days
CPO output rose 6% mom, and but fell 4% yoy, to 1.55m tonnes in Jun 2022, as there were more working days in Jun compared to May 2022 (Hari Raya celebrations happened during 2-3 May). Palm oil output for 1H22 fell slightly by 1.1% yoy to 8.3m tonnes, well short of our forecast of Malaysia’s CPO production growth of 4% to 18.9m tonnes in 2022, due to acute labour shortages.
Malaysia exports fell due to competition from Indonesia’s palm oil
Palm oil exports fell 12% mom and 16% yoy to 1.2m tonnes in Jun. The lower exports were driven mainly by Indonesia’s decision to ease palm oil export restrictions on 23 May 2022 – which led to a shift in palm oil demand from Malaysia to Indonesia. We project Malaysia’s palm oil exports to trend downwards in Jul, as Indonesia has reduced its domestic market obligation policy and palm oil producers can now export palm oil at a rate of 7x of their domestic sales, from a previous ratio of 5x.
Malaysia palm oil stocks likely at the beginning of an upcycle
We project palm oil stocks rising by 21.4% mom to 2m tonnes by end-Jul 2022F, on higher output (+5% mom) and lower exports (-8% mom). We believe CPO prices could trade in the RM4,000-5,000 per tonne range in Jul 2022F as they face higher-than-usual palm oil export supply from Indonesia, after the Indonesian government tweaked its export policies to accommodate higher exports to clear burdensome stocks in the country. We project upstream planters in Malaysia posting flat to higher sequential earnings in 2Q22F due to higher CPO prices. However, Malaysia-listed planters with significant exposure to Indonesian estates could see flat to weaker qoq 2Q earnings on lower sales volumes. 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; planters’ dividend yields of 4.9% could be supportive of their near-term share prices despite the bearish sentiment.