MALAYSIA'S crude palm oil (CPO) stockpile stayed stagnant at 3 million metric tons (MT) in February, but may normalise as China demand recovers, said analysts.
February's month-on-month decrease in output was offset by a month-on-month fall in exports due to the Chinese New Year holidays, DBS analysts said in a March 11 note. They expect the stockpile to lessen -- though staying above 2.7 MT -- in April, as output normalises and China imports rebound after the holiday season.
February's output of 1.5 million MT was down 11 per cent month-on-month but up 15 per cent year-on-year, the latter being driven by the bumper crop effect persisting into the first quarter. The analysts expect output of 1.5 million to 1.6 million MT in March, trending lower in April and May.
Exports to China reached just 80,000 MT in February, down from 300,000 MT in January. Exports to India, however, were up 41 per cent month-on-month and 72 per cent year-on-year at 448,000 MT, helping to bring Malaysia's total palm oil exports to 1.3 MT.
DBS sees scope for the CPO price to rebound on the back of Indonesia's announcement that its zero export levy on CPO will continue till June, as well as its commitment to absorb 6 million MT for its B20 biofuel programme -- the mandatory use of a 20 per cent biodiesel blend.
"We have selectively picked plantation names that can endure the currently low prices and can achieve reasonable earnings growth organically, even in the absence of a significant rally in CPO price," said the analysts, who retain BUY calls for London Sumatra (LSIP), First Resources (FR), Bumitama (BAL), Wilmar (WIL) and TSH Resources (TSH).
In a separate note on March 11, Citi Research analysts said that with the United States-China trade war causing Chinese farmers to reduce their use of soymeal, a 5 to 10 per cent reduction in soy crushing could boost imports of other edible oils, including CPO, in 2019. They further noted that on March 4, China had indicated an increase in palm oil purchases from Malaysia when their respective leaders met.
Apart from biodiesel, the Citi analysts see hydrogenated vegetable oils as key for CPO prices. The CPO environment remains muted, given high carryover inventory from 2018, with price targets ranging from RM2,300/t to RM2,400/t, with Citi's price assumption for 2019 being RM2,400/t.
"While Indonesia and Malaysia’s biodiesel mandates have been significant drivers for demand, we highlight that Hydrogenated Vegetable Oils (HVO) may be the next product that could help biodiesel scale higher," said the analysts.
HVO is of a higher quality than regular biodiesel and can be used unblended without damaging engines, they added. As of 2017, global installed capacity for HVO was 4.745 MT, led by Europe with 3.87 MT. "With 62 per cent of palm oil related products to the European Union being energy based, European acceptance of variants such as HVO can be an important differentiator," said the analysts.
The Citi analysts noted that large planters outperformed small-mid and diversified planters in the last month, adding: "We expect improved demand/better prices in 2019 to help improve cash flow for planters, and cash levels should continue to build further on limited new plantings/reduced capex needs – with improved dividends cementing the theme." Their top Asean plantation picks include Sime Darby Plantations (SIPL), Genting Plantations (GENP) as well as First Resources (FRLD), London Sumatra (LSIP), and Astra Agro Lestari Tbk (AALI).