Malaysia’s  palm  oil  inventory  inched  up  further  in  Oct  as  production decline  was  marginal.  Nevertheless,  the  production  number  was  only held  up  by  Sabah.  We  expect  production  to  decline  significantly  over the  next  3  months,  driving  palm  oil  price  higher.  Soybean  has  also stopped being a factor weighing on palm oil, while crude oil appears to have stabilized. Maintain Neutral. 

Production  dipped  further.  Malaysia’s  palm  oil  production  eased further  albeit  a  marginal  0.2%.  While  West  Malaysia  and  Sarawak experienced a 2.2  –  2.5% MoM decline, Sabah’s output rose by 5.4%. This resulted in a less pronounced overall production decline. We expect production  in  Sabah  to  fall  in  tandem  with  the  rest  in  November, accelerating the seasonal fall in national output. 

Export  still  commendable.  Palm  oil  export  fell  by  1.4%  MoM  but maintained above 1.6m tonnes. Recovery in export  was seen to China (+46.3%), Europe (+38.7%) and the US (+46.6%) while shipment to India fell by 40.4%. 

Local consumption at record high.  Local consumption  rose further to 294.1k tonnes, bringing YTD total to 2.445m tonnes (+28.8% YoY). We expect  the  number  to  pick  up  further  with  the  implementation  of  B7 biodiesel in November.  

Strong dollar effect. We note that while palm oil price in MYR term rose by  13%  from  the  September  low,  it  was  only  up  by  7%  in  USD  term, which means it has hardly deteriorated in terms of affordability. 

Tactical  trading  opportunity.  We  expect  palm  oil  price  to  strengthen further  from  here  on  seasonal  production  weakness,  wh ich  could  be aggravated by earlier dry weather. We also noticed significant dryness in Central,  South and  East  Kalimantan  since  early  July,  which  is causing stress  to  oil  palm  trees  and  could  lift  2HCY15  palm  oil  price.  This significantly  increases  the  probability  of  our  2015  price  assumption  of MYR2,500/t  being  achieved.  We  continue  to  like  Bumitama,  AALI, Genting Plant and SOP.

Source: RHB