Seasonal Slowdown in Production and Exports

The MPOB (Malaysian Palm Oil Board) data for Dec-2024 highlights a seasonal slowdown in production, which dropped to 1.49mn tonnes (-8.3% MoM, -4.1% YoY). The stockpile dropped to 1.71mn tonnes (-6.9% MoM, -25.4% YoY), coming in 2.8% below the market estimate of 1.76mn tonnes. Exports fell to 1.34mn tonnes (-10.0% MoM, -1.5% YoY), while imports surged 71.7% MoM to 37.9k tonnes. Domestic usage saw a significant rise, climbing 52.9% MoM to 309.9k tonnes.

Cumulatively, 2024 production grew by 4.2% YoY, reaching 19.34mn tonnes, up from 18.9mn tonnes in 2023. Exports increased by 11.7% YoY to 16.90mn tonnes, while domestic usage declined sharply by 22.6% YoY to 3.27mn tonnes. Imports experienced the steepest drop, falling 71.8% YoY to 253k tonnes, compared to 899k tonnes in 2023.

Seasonal Decline in Production

In 2024, Malaysia's CPO production showed an increase of 4.25% YoY to 19.34mn tonnes, with Johor leading the growth at 9.2%. Kedah experienced the highest percentage increase at 20.7%, followed by Negeri Sembilan with a 14.5% rise, and Terengganu at 14.0%. Pahang saw a 17.7% increase, while Kelantan's production grew by 6.9%. Perak and Selangor had more modest increases at 2.1% and 9.0%, respectively. However, Sabah and Sarawak combined experienced a slight decrease of 3.22%.

We expect the CPO production to dip seasonally in 1Q 2025, followed by a gradual recovery and an upward trend for the remainder of the year. Overall, we forecast a positive outlook, with an estimated output of 20.0mn tonnes (+3.0% YoY), driven by more favourable weather and easing labour supply constraints.

December Exports

Weaken Exports for Dec-2024 totalled 1.3mn tonnes (-10.0% MoM, -1.5% YoY). For the full year, exports increased by 11.7% YoY to 16.90mn 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 Jan 2025, plunged 21.35% and 26.82% MoM, to 351k tonnes and 300k tonnes, respectively.

CPO Prices May Fall In 2Q With Increasing Supply

The CPO 3-month futures have dropped by roughly 11% over the last month. We believe that the decline in CPO futures can be attributed to several factors, including profit-taking by investors, weaker export pace, lower soybean oil prices and delay in the B40 biodiesel mandate in Indonesia. Meanwhile, the soybean production in South America looks promising with favourable weather, particularly in Brazil. In Argentina, the outlook for soybean production is also very optimistic.

We expect the CPO prices to receive some support in the 1Q due to the seasonal tightness in supply. However, as production begins to increase in the second quarter, the supply situation will improve and this would likely to lead to a decline in prices. This drop would be further pressured by the record soybean supply from Brazil and Argentina, as the export season typically begins in February and continues throughout the year.

Maintain Neutral

We maintain our Neutral recommendation on the sector and 2025 average CPO price forecast of RM3,800/tonne. We have maintained BUY recommendations for IOICORP (TP: RM4.17), UMCCA (TP: RM6.04) and WILMAR (TP: RM3.48) while SDG (TP: RM4.83), KLK (TP: RM21.75) and TSH (TP: RM1.07) are still rated as SELL. Lastly, we upgraded FGV (TP: RM1.25) and KIML (TP: RM2.58) to BUY from Hold, as the recent drop in share price offers a better upside opportunity to accumulate shares. Key downside risks to our sector recommendation include: 1) South America's soybean supply turns out to be lower than market expectations, 2) a more promising demand recovery story, 3) lower-than-expected palm oil production, and 4) significant reductions in production costs.

Source: TA Research - 13 Jan 2025