KUALA LUMPUR (June 11): Malaysia’s stockpile of palm oil may continue to swell in the coming months on seasonal strength in production and weigh on prices, analysts cautioned.

At least seven research houses maintained their neutral view on the plantation sector following the release of palm oil stocks data by the Malaysian Palm Oil Board (MPOB) that showed a 0.5% month-on-month expansion in inventory for May.

Output will likely peak at the end of June or by the third quarter, supported by improving weather conditions and productivity, BIMB Securities said. Demand could be subdued as palm oil is still trading at a small discount against more expensive substitute soybean oil, the research house said.

Prices of the edible oil used in everything from lipstick to diesel have climbed about 5% so far this year as poor weather conditions in key producing nations Malaysia and Indonesia stoked concerns over output and potential tightening in supply.

The benchmark palm oil contract for August delivery was trading at around RM3,887 per tonne on Bursa Malaysia Derivatives on Tuesday. However, prices are down 12% from a high of RM4,407 per tonne on April 3.

Further, strong shipments in May are at risk from Indonesia's move to cut palm oil-related tariffs in June, which will reduce the export tax to US$18 (RM84.99) per tonne and the levy to US$75 per tonne. All in all, the move could lower export costs by US$49 per tonne compared to the previous month.

Malaysia is losing competitiveness in palm oil exports, TA Securities warned. If production stays at its current robust pace, it would lead to burgeoning palm oil stockpiles and potentially limit the upside, the research house said.

TA Securities would also review its current forecast for crude palm oil to average RM4,000 per tonne in 2024 if South America's soybean supply turns out to be lower than expected, demand recovers more meaningfully, and production costs fall significantly.

MPOB data released on Monday showed palm oil inventory totalling 1.75 million tonnes in May in the world’s largest palm oil producing nation after Indonesia, as higher exports and domestic consumption were more than offset by higher output.

Production surged 13.5% from April to 1.70 million tonnes in May, the biggest in six months. Exports, meanwhile, rose to a six-month high of 1.38 million tonnes, up 11.66% from April, the MPOB said.

For strategy, MIDF Amanah Investment Bank said now is the best time for investors to lock in profits for its top picks, such as Ta Ann Holdings Bhd (KL:TAANN) and IOI Corp Bhd (KL:IOICORP), "as we anticipate the increase in share price will gradually decline towards the end of the quarter”.

TA Securities, BIMB, and MIDF have a ‘neutral’ outlook on the sector.