SDG: Palm Oil Inventory Rises Amid Production Gains, Sector Outlook Neutral

Malaysia’s palm oil inventory witnessed a notable increase in October, climbing to its highest level since April 2019. This surge occurred as robust production figures outpaced strong export demand, leading to elevated stock levels despite efforts to reduce stockpiles across the sector.

Performance Review

In October, Malaysia’s crude palm oil (CPO) production saw a significant rise, increasing by 11% month-on-month and 14% year-on-year to reach 2.04 million metric tonnes. This recovery was largely attributed to improved crop quality and enhanced estate management practices across various Malaysian regions, particularly Sarawak, Sabah, and Peninsular Malaysia, all of which recorded production gains. Year-to-date CPO production reached 16.5 million metric tonnes, marking a 2% increase compared to the same period last year.

Concurrently, palm oil exports also demonstrated strength, rising 18.6% month-on-month to 1.69 million metric tonnes. This increase was primarily driven by robust demand from key markets such as China, Africa, and the European Union, which helped offset weaker shipments to India and the Americas. Intertek data indicated that exports to China and Africa surged over 100% and 58% month-on-month, respectively.

Inventory Challenges and Price Volatility

Despite the strong export performance, overall domestic stock levels continued their upward trend for the eighth consecutive month, climbing 4.4% month-on-month to 2.46 million metric tonnes. This was primarily driven by higher CPO stocks, which saw a 16.5% month-on-month and 56.2% year-on-year increase, coupled with elevated opening stock levels. Looking ahead, analysts expect stockpiles to remain high, with any significant drawdown likely constrained by ongoing supply pressure from Indonesia and Latin America, which continues to limit near-term stock reductions.

CPO prices for local delivery registered a slight increase of 0.9% month-on-month and 0.6% year-on-year in October, reaching RM4,412.50 per metric tonne. This modest gain was supported by stronger import demand ahead of festive restocking, firm global vegetable oil prices, and palm oil’s improved competitiveness against substitutes. However, future price volatility is anticipated, with CPO prices expected to trade within the RM4,000-4,300 per metric tonne range in November. Elevated Malaysian inventories and potentially weaker export demand, coupled with ample soybean and soybean oil supply, are expected to exert downward pressure. Additionally, potential delays in Indonesia’s B50 biodiesel mandate and a narrower price discount for palm oil-soybean oil could further limit upside potential.

Investment Outlook

The firm maintains a NEUTRAL stance on the plantation sector. This outlook is based on expectations of a more balanced supply-demand environment amidst continued market volatility, with average CPO price forecasts set at RM4,280 per metric tonne for 2025 and RM4,000 per metric tonne for 2026. For specific investment exposure within the sector, the firm favors SDG, assigning a BUY recommendation with a target price of RM6.41. This preference for SDG is underpinned by its scalable upstream operations, efficient cost structure, healthy balance sheet, and growing recurring income base.

Key risks to the sector view include higher or lower-than-anticipated palm oil and soybean production, stronger or weaker-than-anticipated global demand, changes in edible oils import/export policies and taxes, volatility in global Brent crude oil prices, and broader macroeconomic uncertainties.