Malaysia’s CPO production was marginally higher at 1.68m tonnes (-7.3%mom; +2.8%yoy; +1.0%Ytd) versus 1.63m tonnes in the subsequent year thanks to the productive contribution from most of the states except for Terengganu (-10.0%yoy).
On to-date basis, the average FFB yield has increased year-on-year aided by decent OER performance of 19.76% due to favourable weather and a modest increase in foreign labour inflow. Nonetheless, research house MIDF expects the performance will begin to deteriorate in January 2023 when the palm trees enter the pollination cycle, resulting in lower FFB output.
Palm oil export volumes gained in November, to 1.52m tonnes as traders seek more PO due to price competitiveness against SBO circa USD423 discount parity based on yesterday’s 3-months future price. MIDF anticipates continued demand ahead of the holiday season. As China’s senior official signalled a possible easing of the country’s tough zero-tolerance approach toward the virus between Christmas and CNY, China is expected to resume the majority of its imports, which began in July.
The house notes that the closing stockpiles in November surged 29% to 2.29m tonnes vs. 1.82m tonnes due to a spike in output in-line with productive seasons. Both stocks, CPO and PKO are up, driven by healthy contributions from Sarawak, peninsular, as well as Sabah areas. The house views the Malaysian palm oil stockpiles have peaked and expects a slowdown in 1Q23 in anticipation of low cycle months.
The local CPO delivery price finished marginally higher at RM4,089.50/t in November, with an average of RM4,087.50/t. While to-date, daily prices have dropped to RM3,808/t with an average of RM5,190.7/t. Currently, the discount parity between Malaysian and Indonesian CPO prices is now USD105.7/Mt or RM463.8/Mt, with a three-year average of USD210.7/Mt. Indonesian prices were traded discount to Malaysia due to an extension of USD0/Mt of export levies.
Overall, MIDF expects Malaysian local delivery prices to be lower in CY23, ranging between RM3,000 and 4,000, on the expectation of normalising stocks of 2.0-2.1m tonnes. The CPO price is expected to trade sideways in the remaining days of December at circa RM3,500/mt-RM4,000/mt benefiting from price disparity between CPO against SBO price which to-date amounted USD423/Mt and 3 years average of USD223/Mt, based on 3months future price.
However, the house also recognised its downside risk on fragile demand outlook on the back inflationary pressure coupled with tight household spending on high base interest rate locally and globally ongoing Indonesian extension of zero-levy policy for PO exports in CY23.
All factors considered, the call is NEUTRAL on the sector with CPO target price of RM5,000 Mt/ RM3,500 Mt for CY22 and CY23. Top picks for plantation companies are KLK (TP: RM26.00), Sime Darby Plant. (TP: RM5.00) and Sarawak Plantation (TP: RM2.60).
