Malaysia’s palm oil output fell more than expected to its lowest in seven months at the end of Feb as production shrank to the lowest level in 10 months amid a sharp decline in exports. The tight palm oil supplies had pushed the CPO prices above RM4,000/mt level. At the point of writing, CPO futures ended up a RM4,106/mt. We gathered that refined CPO price is currently trading at an unusual premium to its soybean oil and sunflower oil, which will likely discourage palm oil exports in the coming months. YTD, the CPO price averaged at RM3,910/mt compared to our full-year average of RM3,800/mt. Our top pick is Ta Ann

• Inventories contracted for 4th straight month. Palm oil inventories posted a drop of 5% MoM to 1.91m mt in Feb compared to the market estimates of 1.91m mt. It was also the lowest level in seven months. Nevertheless, the stock/usage ratio recovered from 9.9% to 11.5%, as exports posted a larger decline than production.

• A sharp decline in exports. Palm oil exports plunged 24.7% to 1.01m mt in Feb, attributed to weaker demand from the EU (-17.3%) and India (- 10.3%), partially offset by China (+18.3%), Middle East (+17.9%) and US (+85.2%). It was also the lowest level since Feb 2021. For the first two months, palm oil exports rose 4.5% YoY to 2.36m mt, led by stronger exports to China (+12.2%), EU (+2.4%) and India (+4.8%). Purchases from price-sensitive countries have fallen as the price discount for palm oil has narrowed compared with other competiting vegetable oils.

• Production dropped for a fourth straight month. CPO production shrank 10.2% MoM to 1.25m mt in Feb, as production from both Peninsular Malaysia and East Malaysia fell 6% and 14.8%, respectively. Meanwhile, FFB yield slipped from Jan’s 1.25mt/ha to 1.08mt/ha. The weaker production was likely due to shorter working month and long holiday break during the festive period. We believe production hit the bottom last month and should recover in the coming months.

• Not commercially viable for imports. Palm oil imports tumbled more than 61% since Jan 2024 as most refineries in Malaysia have been running at low or even at negative margins. The poor margin was due to stiff competition in Indonesia as a result of overcapacity and more favourable CPO export tax policy.

Source: PublicInvest Research - 12 Mar 2024