- Malaysian Palm Oil Board (MPOB) has released the country’s palm oil statistics for September 2015. Palm oil inventory rose to 2.63mil tonnes in September, which was the same as December 2012’s record levels. Palm stockpiles were 2.49mil tonnes in Malaysia as at end-August 2015. The palm inventory of 2.63mil tonnes in September was below consensus estimates of 2.7mil tonnes.

- We believe that palm oil production in Malaysia had hit its peak in September and as such, palm inventory would start declining from October 2015 onwards. This in line with the seasonally lower production period in 4Q, which is expected to be compounded by the effects of the haze this year.

- The MoM rise in palm oil inventory in September 2015 was mainly due to a 33.1% fall in domestic disappearance. CPO production contracted by 4.5% MoM in September while palm oil exports growth was 4.4%. Domestic disappearance of palm oil shrank from 216,302 tonnes in August to 144,807 tonnes in September 2015. Domestic disappearance amounted to 1.5mil tonnes in 9M2015 versus 1.9mil tonnes in 9M2014.

- We reckon that the implementation of B10 has been delayed in Malaysia. BMW, UMW Toyota, Mercedes Benz Malaysia, Volkswagen Malaysia and Isuzu Malaysia have said that the use of B10 is not encouraged. According to an auto industry expert, one of the companies said that there is a high level of water content in biodiesel. Excessive water levels can cause deposit formation and degradation of fuel quality, which may affect the engines and void the warranty.

- However, we think that the implementation of B15 in Indonesia is on-going. B15 is expected to absorb about 1.8mil to 2.0mil tonnes of palm oil in Indonesia in 2016. A government official has said that a penalty of Rp6,000/litre would be imposed if the monthly blending quota is not met. We believe that the monthly blending quota is 330,000 kilolitres (116,538 tonnes) this year.

- Average CPO price was RM1,986/tonne in September compared with RM1,970/tonne in August 2015. Year-to-date, average CPO price was RM2,192/tonne, which is within our assumption of RM2,200/tonne for 2015F. Average price discount between CPO and soybean oil was 26% or US$189/tonne in September 2015. The average price disparity between the two commodities was 16.0% in 9M2015 versus 8.6% in 9M2014. The wide price discount between CPo and soybean oil is expected to support demand for palm oil.

- Peninsular Malaysia contributed mainly to the MoM decline in Malaysia’s palm oil production in September 2015. CPO production in Peninsular Malaysia contracted by 8.2% from 1.1mil tonnes in August to 1.0mil tonnes in September. Comparing 9M2015 against 9M2014, CPO output in Malaysia edged up by 1.5% to 14.9mil tonnes.

- Palm oil exports to China inched down by 1.2% MoM to 192,537 tonnes in September 2015. China’s imports of Malaysian palm oil slid by 2.5% YoY in 9M2015.

- Malaysia’s palm oil exports amounted to 12.7mil tonnes in 9M2015, which was a tad higher than the 12.6mil tonnes recorded in 9M2014. Going forward, demand from China is expected to taper off due to the winter season but India’s imports are expected to remain healthy underpinned by a shortfall in domestic production resulting from the drought.

Source: AmeSecurities Research - 13 Oct 2015