Palm oil stocks likely to rise further in Aug
Malaysian palm oil stocks rose 7% mom to 1.77m tonnes as at end-Jul 2022 due to higher output and imports — lower than our expectations.
We project palm oil stocks to rise 13.5% mom to 2m tonnes by end-Aug 2022F due to increasing competition from Indonesian exports.
We are sector Neutral – we note a lack of near-term catalysts as earnings likely peaked in 2Q22F, but 4.7% 2022F dividend yield provides support.
Malaysia palm oil stocks rose 7% mom to 8-month high
Malaysia’s palm oil stocks increased 7% mom and 18% yoy to an 8-month high of 1.77m tonnes in Jul 2022, driven by higher output and imports. The stock level was 2.7% below our and 1.1% below Reuters’ poll estimate of 1.82m tonnes and 1.79m tonnes, respectively, but in line with Bloomberg consensus’ forecast of 1.77m tonnes. Aug palm oil stock was below our forecast due mainly to higher-than-expected exports as Indonesia producers may have delayed exports in anticipation of lower export tax. We view the rise in palm oil stocks as neutral for CPO price as this has been largely expected by the market.
Stronger-than-expected exports in July the key surprise
Malaysian palm oil exports rose 11% mom but fell 6% yoy to 1.3m tonnes in Jul. The higher exports were partly due to slower-than-expected palm oil exports from Indonesia in Jul as exporters held back exports in anticipation of cuts in export tax on Indonesian palm oil from 1 Aug 2022. On 1 Aug, Indonesia had cut its export tax on CPO to US$33/tonne for 1-15 Aug 2022. However, on 8 Aug, it announced a lower export tax threshold for CPO to a reference price of US$680/tonne, down from US$750/tonne previously. In line with this, it raised its CPO export tax to US$52/tonne for 9-15 Aug from US$33/tonne previously. Malaysian CPO output rose 1.8% mom and 3% yoy to 1.57m tonnes in Jul 2022 – in line with our preliminary estimates; this level of CPO output remained 3.4% below the past 5- year average of 1.63m tonnes for Jul as labour shortage issue remains unresolved.
Malaysian palm oil stocks likely to rise further in Aug
We project palm oil stocks to rise 13.5% mom to 2m tonnes by end-Aug 2022F, on higher output (+3% mom) and lower exports (-3% mom). We believe CPO prices could trade in the RM4,000-5,000/tonne range in Aug 2022F. CPO prices could weaken due to stiffer competition from Indonesian palm oil and lower export tax in Indonesia. However, the downside will be capped by current CPO wide pricing discount of US$290-320/tonne against soybean oil. We project Malaysian upstream planters to post flat to higher sequential earnings in 2Q22F due to higher CPO prices. 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. In our view, the sector lacks near-term catalysts as we expect lower CPO prices in 2H22F, but it is supported by 4.7% dividend yield for 2022F.