Malaysia’s palm oil inventory rose 5.2% MoM in November to 2.28m tonnes on lower exports and local consumption. Maintain NEUTRAL.We expect inventory levels to start falling from December/January onwards, as production in Sabah falls more significantly. We continue to believe 2H15 will see stronger CPO prices, on the back of production weakness in Kalimantan as well as improving crude oil prices. 

Production fell 7.5% MoM. Malaysia’s palm oil production fell 7.5% MoM in November, bringing YTD production to 18.3m tonnes (+4.3% YoY). While West Malaysia and Sarawak experienced a 10.3% and 10.9% MoM decline respectively in October, Sabah only experienced a small 0.7% drop. We expect production in Sabah to fall more significantly from next month, in line with the seasonal fall in national output. 

Exports also fell 5.8% MoM. Palm oil exports fell by 5.8% MoM to 1.5m tonnes, bringing YTD exports to 15.75m tonnes (-5.2% YoY). Monthly exports saw a decline to Pakistan (-42%), the US (-40.3%) and the EU (-19.5%), offset by improvements to China (+45.5%) and India (+2.5%).

Inventory rose again, but stock/usage ratio still below maximum. Local consumption fell 23.6% MoM in November, but is still up 25.6% YoY on a YTD-basis. We expect this to pick up further with the nationwide implementation of B7 biodiesel next year. Due to the fall in exports and local consumption, Malaysia’s palm oil inventory in November rose further to 2.278m tonnes (+5.2% MoM). Stock/usage ratio is now at 11.35% (up from 10.8% in Oct 2014), above the 12-year average of 9.4%, but still below the maximum 13.4% level in Dec 2012. 

NEUTRAL maintained. Going forward, we expect inventory levels to start falling from December/January onwards, as production in Sabah falls more significantly. We continue to believe 2H15 will likely see stronger CPO prices on production weakness in Kalimantan caused by 2H14’s dryness and an improving crude oil price (based on RHBRI’s house assumptions). We maintain our CPO price assumptions of MYR2,400/tonne for 2014 and MYR2,500/tonne for 2015. Our Top Picks are Bumitama (BAL SP, TP: SGD1.48), AALI (AALI IJ, TP: IDR30,003), Genting Plant (GENP MK, TP: MYR11.60) and Sarawak Oil Palms(SOP MK, TP: MYR6.60). We maintain our NEUTRAL sector call.

Source: RHB