Stockpiles Decreased in November, But Surpassed Market Expectations

The Malaysia Palm Oil Board (MPOB) reported that palm oil stockpiles for Nov fell by 2.6% MoM to 1.84mn tonnes. However, this still exceeded market expectations in the range of 1.79mn to 1.80mn tonnes. Production declined by 9.8% MoM to 1.62mn tonnes, while exports dropped 14.7% MoM to 1.49mn tonnes. On the other hand, domestic consumption saw a 4.7% improvement to 205k tonnes, and imports rose 35.1% MoM to 22.1k tonnes.

YTD, production increased by 5.0% YoY to 17.85mn tonnes, partially offsetting a 13.0% YoY rise in exports, which reached 15.56mn tonnes. Imports fell sharply by 74.9% YoY to 216k tonnes, while domestic consumption decreased by 23.7% to 2.96mn tonnes. Overall, the data indicates a slightly bearish market outlook, with lower-than-expected stockpiles, reduced exports, and weaker domestic consumption contributing to a more cautious sentiment in the market.

The Decline in CPO Production Comes as No Surprise

CPO production declined by 9.8% MoM and 9.4% YoY, totalling 1.62mn tonnes. This drop was expected as production would typically drop in Nov following the annual peak. Among the states, Terengganu recorded the steepest MoM decline at 20.3%. In terms of volume, Sarawak saw the largest reduction, down by 90.3k tonnes, followed by Sabah with a 65.9k-tonne decrease and Johor with a 48.0k-tonne drop.

YTD, CPO production rose by 5.0% compared to the same period last year, reaching 17.85mn tonnes. Higher output from Peninsular Malaysia offset declines in Sabah and Sarawak. This growth was largely driven by improved harvesting efficiency, following the resolution of earlier labour shortages that had constrained production.

Palm Oil Exports Dip in Nov

Exports fell sharply by 14.7% MoM to 1.49mn tonnes, following growth in the previous month. YTD exports have risen by 13.0% compared to the same period last year, totalling 15.56mn tonnes. This growth was primarily driven by stronger demand from India, the EU, and the Netherlands. Looking forward, cargo surveyors Intertek and Amspec forecast higher palm oil exports for the first ten days of Dec 2024, up 3.86% and 1.07% MoM, to 446k tonnes and 424k tonnes, respectively.

Bullish Now, But Long-Term Outlook Uncertain

The rally in CPO prices, which commenced in October, has been gaining momentum. This surge was primarily driven by expectations of a lower production season, coupled with concerns over adverse weather conditions such as heavy rainfall and flooding, which could further impact palm oil output. Additionally, the implementation of Indonesia's B40 biofuel mandate, projected to increase feedstock demand by approximately 3mn tonnes, is adding upward pressure on prices. This combination of factors has instilled a bullish sentiment in the market, as traders anticipate reduced supply in the coming months, potentially leading to sustained price increases.

Despite the recent rally, we believe the surge in CPO prices is unlikely to sustain over the longterm. Additionally, the outlook for supply suggests that prices could face downward pressure starting from March onwards. Seasonal production increases are expected to boost palm oil supply, with both the MPOB and the Indonesian Palm Oil Producers Association (GAPKI) forecasting higher yields. The expected increase in FFB production will contribute to greater CPO output, potentially easing the current supply tightness. Meanwhile, the price premium of palm oil over soybean oil has surged to a record-high level of USD250/tonne. This significant price gap could dampen demand from cost-sensitive markets, particularly India. Such a wide premium may lead buyers to seek alternative oils or reduce import volumes, potentially impacting overall export performance. Overall, the combination of factors such as increasing supply, growing competition, sustainability concerns, and changing consumer preferences suggests that the price gap between palm oil and soybean oil is likely to narrow in the future, in our view.

Maintain Neutral

We reiterate our Neutral recommendation for the Plantation sector. No change to our 2025 average CPO price estimate of RM3,800/tonne. We have maintained BUY recommendations for IOICORP (TP: RM4.17) and WILMAR (TP: SGD3.48). We recommend HOLD on FGV (TP: RM1.25), KIML (TP: RM2.50), and UMCCA (TP: RM5.59). Meanwhile, SDG (TP: RM4.83), KLK (TP: RM21.75) and TSH (TP: RM1.07) are still rated as SELL. Our assessment remains, but we would review our assumptions if: 1) South America's soybean supply turns out to be lower than market expectations, 2) a more promising demand recovery story, 3) lower-thanexpected palm oil production, and 4) significant reductions in production costs.

Source: TA Research - 11 Dec 2024