Malaysia saw yet another rise in CPO inventory to 2.9m tonnes, mainly on an almost doubling of imports. However, the USDA pegs Indonesian stocks at just 1.51m tonnes (-35% MoM), implying that Indonesian CPO is being shipped to Malaysia to gain export tax advantages. We expect one more month before inventory starts to decline (ie after December), as is historically the case. We maintain our OVERWEIGHT stance and expect CPO prices to start rising in 1Q16.

Production slumps. Malaysia’s CPO production fell 18.9% MoM in November, with declines seen in all areas. We expect output to continue falling for the next few months until the start of the run-up to the next seasonal peak in 2Q16. YTD, production rose 1.4% to 18.56m tonnes.

Exports down 12% MoM. Malaysia’s palm oil exports fell 12.4% MoM to 1.5m tonnes, bringing YTD exports to 15.9m (+1.2% YoY). The main culprit was India (-11.6% MoM), easing after six straight months of record-high imports, and the US (-43.5%), likely due to a drop-off after seasonal peak buying. In Indonesia, exports rose 22.0% YoY in 10M15.

Inventory could rise one more month before dropping. Despite thelarge drop in production vis-à-vis expots, inventory rose again by 2.6% MoM to 2.9m tonnes, due to a 66% jump in imports. Refined CPO imports spiked 97% MoM, which could have come from Indonesia as a result of the new export levy. Malaysia’s Government is contemplating banning Indonesian CPO imports, which could resolve this issue. However, we highlight that the US Department of Agriculture (USDA)has pegged Indonesia’s inventory at 1.51m tonnes (-35% MoM), which is excessively low for Indonesia. We expect CPO stocks in Malaysia to peak in December (as is historically the case) and decline thereafter, which could be the signal needed for CPO prices to move higher.

Positive recent developments: i) US Environmental Protection Agency (EPA) raised its biodiesel mandate by 2-5%, reflecting a 3-year CAGR of 11%, ii) Indonesia has given the green light to roll out B20 biodiesel in 2016, which could see output rising to 4.7m tonnes (from 1.1m tonnes in 2015) and result in exports declining, and iii) South American soybean crop prospects have deteriorated due to very dry weather in Brazil and overly wet weather in Argentina. Oil World now expects Brazil’s soybean crop to drop 1.2% YoY in 2016 (from +1.3% previously).

Maintain OVERWEIGHT. We maintain our OVERWEIGHT call on the sector, as we expect the El Nino impact to result in stronger CPO pricesnext year. Our Top Pick for the region is First Resources, while our Malaysian Top Pick is Genting Plantations.