MIDF Research expects palm oil inventory levels to continue increasing with the upcoming peak production period and moderated export demand, following Aug 2020’s inventory increasing since May 2020.
“The higher stockpiles were mainly in view of higher production and lower export demand. However, it was 4.5% below consensus’ expectations, predominantly as a result of lower
imports and higher domestic consumption,” said MIDF analyst Martin Foo.
The analyst noted that exports fell 11.3% month-on-month (mom) in Aug to about 1.58 million metric tonnes, marking it as the sharpest decline observed since Jan 2020.
“We believe that export demand will continue to be weak, given the possible slower restocking activities in the coming months and a stronger Ringgit. We also remain concerned about demand headwinds such as the resurgence of the Covid-19 outbreak which would lead to intermittent and extended lockdowns, especially from India where the outbreak remains rampant.”
“In addition, the subdued low oil prices might continue to cause palm oil as biodiesel feedstock to be uneconomical, thus lowering crude palm oil (CPO) demand,” said Foo.
Production in Aug was also higher by 3.1% mom, and Foo believes that the higher output could be partly due to the holiday-shortened month of July, as workers celebrated hari Raya Aidiladha, which led to delayed harvesting of the fresh fruit bunches (FFB) into Aug.
“Moving forward, we expect production to continue to increase in the coming months as the palm oil industry is entering into its usual peak production period which is expected to last until October.”
“Production could also be further boosted by more aggressive fertiliser application during the beginning of the year in view of the supportive palm oil price,” said Foo.
The analyst also noted that the average CPO spot price in Aug increased by 9.4% mom to RM2,818 per metric tonne, mainly in view of the possible supply tightness on dwindling inventory levels and recovery in export demand, as well as anticipation of lower production due to labour shortage issues.
“Nonetheless, we believe that the CPO price may retrace moving forward, depending on the quantum of output level during the upcoming peak production and the moderated demand.”
“The current futures price which is lower than the spot price indicates a bearish
outlook on the CPO price in coming months. Historically, we observe that there would normally be a downtrend movement in the CPO price in the third quarter of the year, in line with the seasonally peak production period,” said Foo.
With the belief that inventory levels will grow in the coming months and with export demand expected to dwindle with the resurgence of Covid-19 in major export markets, MIDF maintains a neutral call on the plantations sector.
“While the exemption of export duty for Malaysian palm oil products could help to partially support export demand, we are of the view that it would not be sufficient to offset the anticipated higher production level. As a result, this will lead to a build-up in inventory level which would further weigh on the CPO price moving forward,” said Foo. – Sep 11, 2020
