ASEAN Plantations - Stocks continue to pile up


Malaysia’s end-May 2015 palm oil inventories rose 3% mom to 2.245m tonnes, which is 8% above our estimate of 2.07m tonnes and 3-5% above consensus estimates of 2.12m tonnes (Bloomberg poll) and 2.14m tonnes (Reuters poll). The higher stockpile was due to stronger-than-expected output which is negative for the near-term CPO price. We expect stocks to rise further in June, driven by the seasonally-higher CPO output. This could dampen CPO prices unless demand picks up significantly or poor weather caused by El Nino adversely affects production. We maintain our Neutral call and First Resources as our top pick.

What Happened
Palm oil stocks in Malaysia rose 3% mom and 22% yoy to 2.24m tonnes at end-May. This came as a negative surprise to us and the market, as the inventory is 8% above our estimate and 5-6% higher than consensus numbers. The higher-than-expected Malaysian palm oil stocks were due to a combination of stronger-than-expected output and weaker-than-expected exports. FFB output jumped 7% mom and 9% yoy in May due to seasonal factors. Palm oil exports surged 37% mom and 15% yoy in May thanks to restocking and festive demand. However, this was below our projection of a 45% mom rise in exports, based on cargo surveyors’ data, possibly due to timing issues.

What We Think
The higher palm oil stocks are likely to dent optimism about CPO price prospects, which has risen over the past two weeks due to expectations that the stronger demand for palm oil will help to reduce the inventory level in the country. This, coupled with the warning from BMW that B10 biodiesel which Malaysia plans to implement by Oct, could cause severe damage to its engines, are near-term negatives for CPO price. However, these negatives are offset by potential bullish factors which include 1) concerns that the ongoing El Nino could disrupt palm oil supplies and 2) Indonesia’s plan to raise their biodiesel usage by implementing a CPO levy on planters. For June 2015, we project that palm oil stocks will rise by 1% mom due to higher output.


Technical Analysis
Daily Chart
What You Should Do
We project that the CPO price will range from RM2,000 to RM2,500 per tonne in June and advise investors to be selective in their stock picks. Among stocks under our coverage, we favour First Resources and SIMP. (Read Report)

Read Related Reports
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Source : CIMB Research

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