Tightening inventories seen to have minimal impact on CPO prices

Plantation sector
Maintain overweight: 
The Malaysian plantation sector kick-starts the year with inventories falling a fifth straight month amid tighter production and slowdown in demand from the world’s top two buyers due to an unfavourable trade policy imposed by India, while mounting concerns of the Wuhan virus spread have held up deliveries of agricultural products from the cargoes. The crude palm oil (CPO) price in January 2020 was performing well, rising from RM2,833 a  tonne to RM2,969 a tonne. For 2020, we have a full-year CPO price assumption of RM2,600 a tonne as we think CPO prices are likely to average around RM2,800 a tonne in the first half before easing to RM2,400 levels. We maintain our “overweight” call on the sector outlook and our three top picks are Ta Ann Holdings Bhd, Sarawak Plantation Bhd and TSH Resources Bhd.

In contrast to market expectations of 1.7 million tonnes, palm oil inventories were down by 12.5% month-on-month (m-o-m) and 41.5% year-on-year (y-o-y) to 1.7 million tonnes as output weakened to a 47-month low despite exports weakening 13.1% m-o-m. The steeper-than-expected drop brings the inventory level to the lowest since June 2017. Meanwhile, the stock-usage ratio softened from 9.8% to 9.7%.

Palm oil exports dropped 13.1% m-o-m and 27.8% y-o-y to 1.2 million  tonnes, dragged by the weaker demand from the global top two consumers, namely China (-31.1%) and India (-66.2%). On the other hand, palm oil exports to Pakistan soared 88% m-o-m while the European Union and US markets rose 26% and 67% respectively.

The Malaysian palm oil production witnessed its fourth straight monthly declines, down 12.6% m-o-m to 1.1 million tonnes, the lowest level since February 2016. On a y-o-y basis, it saw the steepest ever drop of 32.9% as production from Peninsular Malaysia and Sabah and Sarawak dipped 41.2% and 22.6% respectively. The steep decline was mainly due to the cut in drastic fertiliser application during the first eight months of 2019.

More than a dozen provinces in China announced an extension of the Lunar New Year holidays until this week as the nation attempts to halt the spread of the virus. With mounting concerns over the Wuhan virus, we believe the export volume to China in February is likely to slow down. Nevertheless, we think there is a minimal impact on CPO prices given the tightening inventory levels. — PublicInvest Research, Feb 11

Source : The Edge Markets

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