Although production is expected to taper off in the coming months, weakening demand in the export market may be likely given the high stock levels.
RHB Sector Update said today (Nove 14) that this could mean that Palm Oil (PO) stocks would still exceed 2m tonnes – potentially until year’s end at least.
Recent developments:
i. The probability of a strong El Nino is at 60% currently, with the median Nino 3.4 Index forecast at 1.9 – according to the Australian Bureau of Meteorology.
However, the US National Oceanic and Administrative Administration said El Nino conditions have plateaued in mid-October at the level of a moderate El Nino event.
According to Indonesia’s weather bureau, rainfall in parts of Sumatra and Kalimantan have already been declining since July, which could result in delayed crop ripening. This could mean that Indonesian production may see 2023’s peak output being delayed to 2024.
RHB notes that production in Indonesia has already declined 11.5% MoM in August. Overall, they still expect El Nino to impact productivity more significantly from late 2Q24 onwards, thereby pushing estimated CPO prices higher in 2H24;
ii. Crude oil prices have fallen 16% in the last four weeks, despite continued geopolitical tensions. As a result, the palm oil-gas oil (POGO) spread has gone back to being negative, thereby reducing chances of discretionary biodiesel demand of 2.5-3m tonnes returning to the market;
iii. Despite the war, Ukraine’s oilseed crop harvest this year has been very strong – with sun seed output expected to rise 28% YoY in 2023. Even with the absence of a grains corridor, Ukraine has been able to continue exporting its sunflower oil crops through other channels.
Since the beginning of July, exports of Ukrainian sunflower seed oil to the EU rose 31% YoY, causing sunflower oil (SFO) prices to drop >20% over the last six months.
This resulted in increased competition with PO, as SFO was priced more attractively. However, this phenomenon reversed in Oct 2023 – CPO price is now at a 5% discount.
Malaysia’s September PO stocks jumped to 2.45m tonnes (+5.8% MoM) as output and exports grew 5.9% and 21% MoM. The stock/usage (S/U) ratio is now at 13%, above the 15-year historical average of 10%.
Although production is set to taper off in the coming months, weakening export market demand may be likely given the high stock levels. This could mean PO stocks still exceed 2m tonnes – potentially until year’s end, at least.
RHB maintain sector NEUTRAL derived upon a tactically positive trading strategy retained. There is no change to their MYR3,900/tonne CPO price assumptions for 2023 and 2024. RHB continues to prefer Malaysian vs regional players. Local Top Picks include IOI Corp (IOI), Ta Ann (TAH), Sarawak Oil Palms (SOP), Golden Agri (GGR), and London Sumatra (LSIP).
Stronger Than Expected Exports
Meanwhile, Kenanga’s Plantation Sector Update sighted a strong Oct 2023 palm oil output of 1.937m MT (+6% MoM, +7% YoY) which was within its (4%) and consensus (3%) expectations. It also could be the monthly peak output for 2023 or very near so.
After Sept decade low exports, exports in Oct improved 21% MoM to 1.466m MT which was in line with their estimate (4%) but 13% above consensus. However, closing inventory continued to inch up to 2.449 MT (+6% MoM, +2% YoY) but still comparable to last Oct level.
Average Oct 2024 CPO price softened a little to RM3,640 (-2% MoM, -1% YoY) but with stronger seasonal demand looming ahead, Kenaga is maintaining 2023-24 CPO price forecasts at RM3,800 per MT. The supply-demand outlook is expected to stay tight with continual growth in demand likely against an uncertain supply recovery.
Trading at 1.1x PBV, the sector’s downside is supported to some extent but with a strong El Nino probably priced in, there is no strong upside catalyst unless El Nino worsens.
Kenanga remains NEUTRAL on the sector with KLK (OP, TP RM24.50) as their preferred pick in view of its good track record, expansion appetite and defensive balance sheet.
2024 supply-demand situation looks tight
2023 palm oil output is improving but 2024 FFB harvest may encounter delays due to rain deficits in Indonesia’s key palm oil producing areas, namely Sumatera and Kalimantan.
So far, the rain deficit is not expected to dampen overall harvest much unless El Nino worsens, which is possible but not yet probable.
Edible oil demand for 2023 is reverting back to its usual 3%-4% YoY trendline growth. This is likely to persist into 2024 thanks to robust demand for food and biodiesel.
Moreover, Indonesia – the largest user of palm oil – is likely to keep inventory levels high as it faces an election later in 2024. Likewise, India – a major palm oil importer – will also be holding a general election in early to mid-2024.
As such, 2024 supply-demand trend is expected to stay tight unless Latin America’s soya harvest in Apr/May 2024 is bountiful. Maintain average CPO price forecasts of RM3,800 per MT over 2023 and 2024
Margins should improve on easier costs. Although still high by historical count, average fertiliser price has fallen by 30% YoY despite a MoM uptick in Oct 2023.
Likewise, diesel cost has also eased YoY and FFB harvesting routine is normalising in Malaysia.
Demand for PKO (hence PK) should also normalise over 2024 as inventory adjustment bottoms out to trigger fresh buying resumes. CPO cost is affected by palm kernel (PK) sales, a palm oil mill by-product when extracting CPO.
While CPO prices have held firmer on steadier food (70%) and biofuel (30%) demand, PKO’s usual 20%-30% price premium to CPO disappeared since mid-2022 as demand for personal care and cosmetic products is more sensitive to economic slowdown.
Maintain NEUTRAL
The plantation sector is defensive and not overly expensive. Palm oil offers good long-term exposure into the global food chain and biofuel supply.
Although CPO prices and earnings can be volatile, well managed plantation groups offer good returns as well as growth.
Estates are also great store of value as agriculture land for new oil palm development is now scarce and the competition for land from infrastructure and urbanisation is not abating.
Kenanga prefers KLK (OP; TP: RM24.50) for the group’s strong track record, expansionary plan and strong balance sheet. PPB (OP; TP: RM19.30) should see earnings recovery in FY24 thanks as to associate’s (Wilmar) exposure into China and India along with its own growing consumer essential products (flour, feed, bread, canned food) in SE Asia.
