■ Palm oil inventories rose 6% mom to a new record high of 2.83m tonnes at end-Oct.
■ We are negative on this, as palm oil stocks are above our and Bloomberg consensus estimates, and the US raised its soybean production to record levels, yesterday.
■ We expect palm oil stocks to climb 1% mom to 2.86m tonnes at-end Nov and CPO prices to trade at RM2,100-2,500 per tonne for the remainder of the year.
■ We anticipate an unexciting 3Q results season due to lower CPO selling prices.
■ We stay Neutral on the sector and prefer FR, AALI and GENP for exposure.
Palm oil stocks climbed to another new record high
Palm oil stocks in Malaysia jumped 6% mom and 26% yoy to 2.83m tonnes as at end-Oct to a new record high. The stock level was 4% ahead of our and consensus (Bloomberg and Reuters) forecasts of 2.72m tonnes due mainly to higher-than-expected output and imports. CPO output rose 4% mom in Oct due to higher FFB yields, while palm oil imports were relatively unchanged despite limits on Indonesian CPO imports.
Higher stockpiles are negative for CPO prices
We view the larger-than-expected palm oil stockpile as well as yesterday’s upgrade in US soybean production and yields by the USDA to record levels to be negative for CPO prices. U.S. soybean production for the 2015/16 crop year was pegged at 3.981bn bushels and average yield at 48.3 bushels per acre. Those figures eclipsed the previous records of 3.927bn bushels and 47.5 bushels per acre, both set in 2014.
Supportive factors for CPO prices
The higher palm oil and soybean stockpiles are partially offset by concerns over potential disruption to palm oil output in 1Q16 due to the lower rainfall experienced in key palm oil regions in Indonesia from Jun-Oct 15 and the Indonesian government plans to significantly raise its biodiesel usage in 4Q15 and 2016. We expect these, coupled with the weak Ringgit, to cushion the downside risk to CPO prices.
Palm oil stocks projected to rise by 1% mom in Nov
Our initial tentative estimates suggest that palm oil stocks may rise by another 1% mom in Nov to 2.86m tonnes before receding in Dec. Production is expected to decline 10% mom due to seasonal factor. We expect exports to fall due to competition from soybean oils. CPO price discount against US soybean oil has narrowed to US$108 per tonne.
Unexciting 3Q results season
We expect planters to post weaker 3Q15 earnings on a yoy basis, as we expect the 4% yoy rise in CPO output will only partly offset the 7% yoy drop in local CPO price in the same period. However, 3Q15 results should be much better than 2Q15’s, as the 11% qoq bounce in output should more than offset the 7% qoq drop in average CPO price.
Maintain Neutral rating and key picks
We expect near-term CPO prices of RM2,100-2,500 per tonne and maintain our average CPO price forecast of RM2,230 per tonne for 2015 and RM2,450 for 2016. We maintain our Neutral sector rating, with a preference for First Resources, Astra Agro and Genting Plantations. (Read Report)
Read Related Report
1) Plantation Companies - Worsening oversupply by DBS Group Research, published on 11 November 2015
Source : CIMB Research