Malaysia’s December palm oil inventory fell 11.6% MoM
to 2.013m tonnes as production weakened to its lowest level
since Feb 2014.Maintain NETURAL. Heavy flooding was the main
culprit of the sharp production decline. Inventory level will likely
continue to fall in the next 3-4 months as the seasonal downcycle
progresses. While falling inventory should drive palm oil price
higher, upside is limited by the weak oil price.
Production down sharply. Malaysia’s production fell by
22.0% MoM to 1.365m tonnes in December, with West Malaysia’s
production plunging by 30.1% while Sabah and Sarawak both fell
by 14%. The unusually sharp West Malaysia decline was caused by
heavy flooding. We believe the extreme dryness in 1Q14 may have played a
ro le and the impact will likely become more evident in the coming
two months. For the full year, Malaysia’s production totalled 19.669m
tonnes (+2.4% YoY).
Exports remain steady. Exports rose by 0.4% MoM to
1.520m tonnes, bringing the full-year number to 17.264m tonnes (-4.7%
YoY). There was a steep increase in December shipments to India
(+27.5% MoM) ahead of the increase in import tax, while exports
to Europe rose by 16.7% MoM. In 2014, India and China swapped
places as Malaysia’s biggest palm oil customer. India’s 2014
purchase jumped 38.9% to 3.230m tonnes while exports to China fell
by 23.3% to 2.839m tonnes.
Weak oil price limits upside. In 2014, Malaysia rolled
out its mandatory biodiesel programme nationwide, resulting in local
consumption surging by 25.1% to 2.864m tonnes, soaking up 14.6%
of production. With biodiesel margin now in deep negative
territory, we believe biodiesel demand will fall, limiting
upside to palm oil price. Nevertheless, in the immediate term,
falling supply should outweigh the potential demand weakness. We
believe as long as inventory continues to fall, palm oil price
could inch up further.
Maintain NEUTRAL. We maintain our NEUTRAL call
on the sector. Although near-term upside for palm oil price appears to
be on the cards, our average price assumption of MYR2,500/tonne
could be slightly optimistic and may be subject to a downward
revision.
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