Malaysia’s palm oil inventory declined further  in Feb 2015  amidst weak shipments,  as  production  fell  further.  Maintain  NEUTRAL.  We  believe shipment  numbers  are  unusually  weak  due  to  the  Lunar  New  Year, which  led  to  exports  to  China  plunging  to  just  65,000  tonnes.  Still, inventory  should  remain  relatively  low  this  year  due  to  very  muted production growth.  A catalyst to watch is Indonesia’s revival of its B10 biodiesel mandate.

Exceptionally  weak  export  numbers.  Last  month,  Malaysia  exported 971.6k tonnes  of palm oil  –  the  first time it fell below 1m  tonnes since Feb 2007. What stood out the most about the export data was that China bought  only  64,800  tonnes  of  palm  oil  from  Malaysia  compared  with 216,300 tonnes in January. We believe this was due to the short working month in February, owing to the Lunar New Year.

West  Malaysia  production  normalises.  Malaysia’s  production continued  declining  seasonaly  in  February,  dropping  by  a  smaller quantum of 3.4% MoM vs  15.0% in January. This was helped by a 10% rebound  in  West  Malaysia  production,  which  we  believe  was  a normalisation  from  an  extremely  weak  January  caused  by  flooding. Production  fell  18.1%  YTD  on  a  12-month  impact  of  an  extremely  dry 1Q14. We believe the effect of  last year’s dry weather may not be over and may continue  to impact  production in March. What would be  much more significant in affecting this year’s production is the 2H14 drought in Indonesia,  of  which  the  impact  will  be  seen  in  the  second  half  of  this year.

Local usage moderates.  Local consumption in February moderated to 240,700  tonnes  from  311,800  tonnes  in  Jan  2015.  YTD  growth  is  still very strong at 30.9%, due to the mandatory B7 biodiesel rollout.

Catalyst  watch.  We  believe  the  immediate  catalyst  for  the  sector  will come in the form of  the  revival of Indonesia’s B10 programme,  following the  change  in  biodiesel  pricing  to  a  cost-plus  basis.  We  remain NEUTRAL on the sector, with BUY calls on Bumitama Agri (BAL SP, TP:SGD1.48),  Astra  Agro  Lestari  (AALI  IJ,  TP:  IDR28,569)  and  Genting Plantations (GENP MK, TP: MYR11.40).