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Apr 12, 2016 11:19:17
Plantation: Inventory Drops Below 2m Tonnes
Malaysia’s inventory level has dropped below the all-important 2m tonne psychological mark to 1.89m tonnes. We expect it to hover around these levels for the next few months, as CPO production may remain flattish until end-2Q16/early-3Q16. We also expect strong CPO prices to persist until the start of the run-up of the next seasonal peak. Maintain OVERWEIGHT. First Resources, Genting Plantations and London Sumatra are our Top Picks for Singapore, Malaysia and Indonesia respectively.
¨ Malaysia’s CPO production rose 16.9% MoM in March, coming from a short month in February and an improvement in rainfall. YoY production was still down 18.4% in March, while YTD production declined 10.2%. We expect FFB output to remain flattish over the next few months, before starting the run-up to the next seasonal peak at end-2Q16/beginning-3Q16.
¨ Better exports in March. Given the shortened February (a festive month), March’s exports recovered 22.9% MoM and brought YTD (Mar 2016) exports to an increase of 10.5% YoY. This was due to higher exports to India (+10% YoY) and the EU (+23% YoY), offset by lower exports to China (-27% YoY).
¨ Inventory fell below 2m tonnes, dropping by a steep 13.1% MoM to 1.8m tonnes. We highlight that stock/usage ratios are now at 10.9% (down from 13.2% in February) and close to the 12-year average of 10%. We expect inventory levels to hover around these levels for the next few months.
¨ Recent developments:
i. US Department of Agriculture’s (USDA) planting intentions survey results show that soybean planting to decline 0.5% to 82.24m acres in 2016, while corn planting is set to rise 6.4% YoY to 93.6m acres;
ii. China’s edible oil imports rose YTD Feb 2016 (+35.6% YoY) while palm oil imports rose 5.7% YoY (vs soybean import decline of 8.7%);
iii. India saw strong 21.8% YoY growth in edible oil imports in YTD Feb 2016, with palm oil imports up 11%. We expect this growth rate to be maintained, as India expects to import 10-15% more edible oil in 2016;
iv. Malaysia’s reinstated export tax levy of 5% for April (for CPO price above MYR2,400/tonne) should see downstream players record better margins as this translates to a USD30-35/tonne discount for CPO feedstock. Although it is still smaller than Indonesia’s USD50/tonne discount, it does make Malaysian refiners slightly more competitive.
¨ Still OVERWEIGHT. We expect more upside for plantation stocks, as most still only reflect CPO prices of MYR2,300-2,500/tonne. YTD, Malaysian CPO production is down 10% but CPO prices have risen 22%. Our Top Pick for the region remains First Resources, while Genting Plantations and London Sumatra Indonesia are top choices for Malaysia and Indonesia respectively.