Regional Plantation Companies: Price recovery postponed?
- Rising inventory trend may delay price recovery
- Soybean oil price trend should prevent palm oil price from entering prolonged bearish trend
- CPO discount should attract demand in September
- Maintain BUY on WIL, FR, BAL, and LSIP
Inventory climbed to 2.0m MT territory as export remained weak despite tumbling CPO price.
Malaysia’s palm oil stock climbed to 2.0m MT level (+12% y-o-y, +18% m-o-m), above our 2022 monthly inventory level forecast of 1.5m-1.8m MT. Major palm oil buyers seem to have delayed the palm oil purchase to gain better prices as palm oil is also ample in Indonesia. Export volume slightly dropped by 1.7% m-o-m to 1.29m MT (+12% y-o-y) amid rising production trend as seasonal high production kicked in in August as CPO production volume reached 1.73m MT (+1.4% y-o-y, +10% q-o-q).
We think the tumbling price should create a demand for palm oil.
The current palm oil soybean oil spread has widened to US$600-700 per MT level. This indicates that the current pressure on palm oil price is isolated solely to palm oil supply-demand situation amid a flood of cheap palm oil from Indonesia and seasonal high production trend. The soybean oil price remained firm amid a thin soy crushing margin, especially in China, due to high soybean price and relatively mild soymeal price. The situation prevents any excess soybean oil production that could disrupt the whole vegetable oil complex supply and demand trend. We believe price divergence will create demand for palm oil, especially for India, as there is seasonal high demand around Deepavali.
Investors have been bearish on palm oil stocks since August.
Palm oil stocks haven’t moved significantly since the end-of-July correction as investors have been bearish on 2H22 and 2023 earnings outlook despite the stronger-than-expected earnings achievement in 1H22. High level of inventory in Malaysia may delay palm oil price recovery longer than our initial expectation in mid Sep 22 despite widening spread between soybean oil and palm oil. We maintain our average FY22 and FY23 Malaysia palm oil benchmark and Indonesia domestic price of US$1,125 per MT and US$750 per MT. We maintain our BUY call for First Resources (FR), Bumitama (BAL), Lonsum (LSIP), and Wilmar (WIL).
