Malaysia’s CPO production ended the year at 1.62m tonnes (-3.7%mom; +11.7%yoy; +1.9%Ytd) versus 1.45m tonnes in subsequent year banking contribution from most of the states except for Terengganu (-10.9%yoy) due to wet weather seasons. The average FFB yield surged by +9.5% year-on-year to 1.38 t/ha, however OER marginally lower to 19.55% due to unfavourable weather and slow foreign labour inflow. Jumping into 1QCY23, MIDF expects the performance will taper off a bit due to the palm trees entering the pollination cycle and the continuation of wet weather seasons, resulting in lower FFB output.
Palm oil export volumes remained sticky in December at 1.47m tonnes (-3.5%mom; +3.1%yoy; +1.1%Ytd) as traders seek more Malaysian PO due to price competitiveness against SBO circa USD455/Mt discount parity based on yesterday’s 3-months future price. MIDF anticipates strong demand in the run-up to the holiday season on the anticipation that China will resume the majority of its imports, which began in July, as the country’s borders reopen, demonstrating the country’s confidence in tackling the Covid. The inventory level remained high. Closing stockpiles in December-22 surged by +35.9%yoy to 2.20m tonnes vs. 1.61m tonnes due to a spike in output in-line with productive seasons. Both stocks, CPO and PKO are up +51.5%yoy and +54.2%yoy respectively, boosted by healthy contributions from Peninsular (+53.4%yoy), Sabah (+51.8%yoy), as well as Sarawak (+51.5%yoy) areas. The research house believes the Malaysian palm oil stockpiles have peaked and gradually consolidate in 1QCY23 in anticipation of low cycle months.
In December, the local CPO delivery price ended the year marginally lower at RM4,045.50/t (-1.1%mom), with an average of RM3,960.50/t. For the last year, CPO prices managed to settle at average daily/monthly price of RM5,131.9/t and RM5,125.6/t. Currently, the discount parity between Malaysian and Indonesian CPO prices is USD154.9/Mt or RM536.8/Mt, with a three-year average of USD204.6/Mt. Indonesian prices were traded discount to Malaysia due to an extension of USD0/Mt of export levies. Overall, we expect Malaysian local delivery prices to be lower in CY23, ranging between RM3,000 and 4,000, on the expectation of normalisation closing stocks of 2.0-2.1m tonnes.
The CPO price is expected to see volatile trade in months of January to March at circa RM3,500/mt-RM4,500/mt benefiting
from price disparity between CPO against SBO price which to-date amounted USD455/Mt and 3 years average of USD236/Mt, based on 3-month future price. However, MIDF also recognises its downside risk on 1) fragile demand outlook on the back inflationary pressure coupled with tight household spending on high base interest rate locally and globally 2) another Indonesian extension of zero-levy policy for PO exports in CY23.
All factors considered the house maintains a NEUTRAL stance on the sector with CPO target price of RM3,500 Mt for CY22. Top picks for plantation companies are Sime Darby Plant. (TP: RM5.50) and Sarawak Plantation (TP: RM2.60).
