Malaysia’s  palm  oil  inventory  rose  marginally  in  September  despite  adip  in  production  and  export  recovery.  It  is  likely  that  the  seasonal production  downturn  has  already  started  and  could  be  supportive  of prices in the next 3-4 months.  We expect more prominent weakness in West Malaysia’s production vs Sabah/Sarawak’s in 4Q due to dryness in 1Q this year. Maintain NEUTRAL.

Production dip.  Malaysia’s palm oil production eased by 134.9k tonnes or 6.6% to 1.897m tonnes in September, mainly due to a 9.1% decline in West Malaysia’s production. Sabah and Sarawak’s production declinedby  2.2% and 6.0% respectively. The sharper  production  decline in West Malaysia suggests that the impact of dry weather from 1Q  this year is starting to become evident. 

Broad recovery in exports.  Palm oil exports  rose by 13.3% m-o-m to 1.628m tonnes. While the increase in export was broad-based, the 82k tonnes rise in shipments  to India was the main contributor.  Imports also increased to 38.5k tonnes from 17.6k tonnes a month earlier. 

Local consumption. Local consumption increased to 271.3k tonnes, the highest  since  Aug  2008.  On  a  YTD  basis,  local  usage  climbed  32%,likely due to the continued rollout of biodiesel in the rest of the country.   Export  duty  exemption  continues.  The  exemption  of  export  duty  on CPO will continue until Dec 2014, as mentioned in the 2015 Budget. Thisshould  help to sustain the current export momentum especially to  India,should India raise its import duty on refined edible oil. 

NEUTRAL  on  sector.  We  expect  palm  oil  prices  to  strengthen  further from  here  on  seasonal  production  weakness,  which  will  likely  be aggravated by  the  dry weather  earlier. Equity prices are not reacting to the slow climb in palm oil prices as valuations for most stocks are still not compelling  enough.  Moreover,  the  weakening  crude  oil  price  is  also  a dampener. Nevertheless, should palm oil prices continue to move higher, interest could return as 2015 should turn out to be a better ye ar for the sector. 

Source: RHB