While inventory hit a new high, we believe a decline is now imminent as the production downcycle has already begun. We expect the El Nino drought impact on production to become very evident in the months ahead. Global dependence on palm is at a record high, which should amplify the effects of El Nino on edible oil price. Hence, any weakness in reaction to stockpile number will represent a buying opportunity.

Production peaks. Malaysia’s palm oil production started easing in September, falling by 4.5% MoM to 1.959m tonnes. West Malaysia led the decline, down 8.2% MoM, while Sabah was down 1.4% MoM. Only Sarawak managed to eke out a gain of 1.7%. We believe production would now continue its decline into February or March. Oil yield for the first nine months stood at 2.8 tonnes/ha vs 2.84 tonnes last year.

Exports commendable. Exports rose 4.4% to 1.678m tonnes, which was a commendable level and the highest September exports ever recorded. The increase was mainly driven by a rebound in shipments to India to 356,000 tonnes, while China’s imports remained flat.

Record stockpile. Stockpile rose by 5.5% MoM to a record high of 2.628m tonnes, marginally surpassing Dec 2012’s level by 799 tonnes. Other than the still-high production, factors contributing to this were an increase in imports and a drop in local consumption. Given the steepness of West Malaysia’s production decline and the likelihood of Sabah following suit soon, there is a high possibility that inventory has indeed reached its peak.

Soybean factor. Soybean crop in the US is now 69% harvested, with 89% of crops being rated good to excellent. As full harvest could be seen as early as end-October, this should remove the soybean overhang factor and allow palm oil price to resume its recovery.

Stock picks. First Resources continues to be our top sector pick. We also like Genting Plantations and Astra Agro Lestari.

Source: RHB Research - 13 Oct 2015