Malaysia’s palm oil inventories for Sept ended with a rise of 6.9% MoM to break the psychological level of 2m mt, which was significantly higher than consensus estimate of 1.94m mt. In view of higher production in the subsequent months and the unattractive gap between palm oil-soybean oil prices, we see further upside risk to the inventory level. At the point of writing, CPO futures slipped RM25 to RM4,227/mt. YTD, CPO price averaged at RM4,025/mt. Maintain Neutral on the sector with a full-year CPO price assumption of RM3,800/mt.

• Inventory gained for second month. Palm oil inventories rose 6.9% MoM to 2m mt, the highest level in 8 months. Consequently, the stock/usage ratio grew from 8.8% to 9.9% as domestic consumption slumped despite a slight decline in production.

• A slight rebound in exports. Following a sharp decline in the previous month, palm oil exports rose marginally to 1.54m mt in Sept. The gain was mainly led by China (+28.6%), EU (+28.1%), Middle East (+2.3%), the US (10.5%) while exports to India dropped 2% following the steep increase in duties on palm oil imports.

• Production snapped 2-month gain. CPO production slipped 3.8% MoM to 1.82m mt, as lower production from Peninsular Malaysia (-3.8%) was partially offset by stronger production in East Malaysia (+0.9%). We expect production to see a rebound in Oct before hitting the peak.

• Expecting CPO price to pull back in the near term. We believe the current premium over soybean oil is not sustainable as palm oil production has recovered especially with Indonesia ramping up output. Currently, the CPO premium to the soybean oil stood at USD90/mt, making it less attractive for price sensitive buyers like China, India, Pakistan. In addition, palm oil will solidify during winter, making it more difficult for consumption. The production in Malaysia is projected to see strong growth in the next 2 months before it peaks. For 2024, Malaysia’s palm oil production is expected to reach 19.6m mt this year compared with 19.6m mt last year while Indonesia’s production is expected to be 1m mt lower compared to last year.

• Joy from the delayed anti-deforestation regulation. Malaysian planters can heave a sigh of relief after the European Commission said it would propose delaying implementation of a law banning the import of commodities linked to deforestation by a year following mounting pressures from the 20 of the EU’s 27 members. The proposal would need the approval of the European Parliament and member states.

Source: PublicInvest Research - 11 Oct 2024