Production enters downcycle, inventory to follow. Malaysia's production is entering a seasonal downcycle after peaking at 2.0m tonnes in September. The inventory downcycle should commence soon with the production downcycle having begun. We note that since 2001, the decline in inventory has been averaging 436.7k tonnes from peak to trough, which will put inventory at 2.1m tonnes by mid-2013. In a low price environment like the current one, the inventory decline could be even faster. During the '08 to '09 and '09 to '10 inventory downcycles, stockpiles were down by an average of 903.3k tonnes from peak to trough. This may put Malaysia's mid-2013 inventory trough at just 1.6m tonnes.

Biodiesel kicking off? We note a marked increase in local consumption to 208.7k tonnes compared to the average 154.5k tonnes since the start of 2011. As there was no increase in oleochemical shipment during the month, the additional consumption could have been due to conversion to biodiesel in preparation for the nationwide rollout of mandatory B5 biodiesel.

Shipment remains robust. Despite concerns of demand weakness, China and India have continued to snap up edible oil. As China's imports of edible oil surged 25.8% through October, 2012 is poised to be the first year since 2007 that China has raised its edible oil imports, which have been steadily declining since 2008. Purchases from India have been strong too this year, rising by 22.4% through September. Even crisis-plagued Europe has raised imports by 14.5%, judging from Malaysia's shipment numbers.

Production declines. Malaysia produced 1.938m tonnes of palm oil in October 2012, down 3.3% or 65.8k tonnes from September after a 20.4% surge the previous month. Sabah production continued to improve m-om (+1.4% m-o-m) while output from Peninsular Malaysia (-6.2%) and Sarawak (-1.1%) led the m-o-m decline. Production was, nonetheless, still marginally higher on a y-o-y basis and 1.6% stronger y-o-y than the
October 2011 output, bolstered by a 10.6% y-o-y increase in Sarawak. However, the YTD production was still lower than that of the same period in 2011 after a lacklustre 1H2012. However, this gap has narrowed to a 4.3% shortfall, an improvement from 9M2012's 5.1% drop.

Stronger exports. In October, 1.758m tonnes of palm oil were shipped out, which was 16.2% or 244.6k tonnes higher than in September. Although China and India ' the largest consumers of palm oil ' reduced purchases by 60.3k tonnes and 9.0k tonnes respectively, strong demand from the European Union (+114.5k tonnes) and Pakistan (+49.7k tonnes) more than offset the weaker buying from the two emerging countries. Despite the m-o-m increase, exports remained weaker y-o-y for the fifth consecutive month. Shipments fell 4.6% y-o-y as China (-127.8k tonnes) and Pakistan (-102.1k tonnes) trimmed purchases. YTD, exports totalled 14.233m tonnes, 3.4% softer compared with that from the Jan-Oct 2011 period.

Inventory build-up takes a breather. Given the softer production and firmer exports, palm oil inventory in Malaysia moved up marginally by 1.1% m-o-m to 2.509m tonnes while CPO stockpiles eased by a slight 2.7% m-o-m to 1.563m tonnes after a 34.9% surge the previous month. Refined palm oil inventory, however, rose 8.1% m-o-m to 0.945m tonnes. That said, inventory was still higher by 19.4% on a y-o-y basis.

Source: OSK