TSH: Palm Sector Navigates High Inventories, Anticipates Demand Recovery and Policy Boost
| Investment Bank | TA SECURITIES |
|---|---|
| TP (Target Price) | RM0.25 (+25.0%) |
| Last Traded | RM0.20 |
| Recommendation |
AmInvestment Bank has maintained its OVERWEIGHT rating on the Plantation sector, highlighting a complex outlook characterized by persistently high inventories and subdued demand, yet with promising signs of recovery and policy-driven tightening in the longer term. The sector’s performance in 2025 saw record production levels juxtaposed with significant export challenges.
Current Market Dynamics: High Inventories and Production Growth
Malaysia’s palm inventory notably rose to 3.1 million tonnes in December 2025, surpassing Bloomberg consensus estimates of 3 million tonnes and marking an increase from 2.8 million tonnes in November. This level nears the all-time high of 3.2 million tonnes recorded in December 2018. Despite the high stockpiles, Malaysia’s CPO production in 2025 surged by 4.9% to reach 20.3 million tonnes, the first time output has exceeded 20 million tonnes. This growth was largely attributed to favorable weather conditions in Sabah during the fourth quarter. However, monthly CPO output in December experienced a 5.5% contraction to 1.8 million tonnes, primarily due to localized flooding in regions like Pahang, Johor, and Terengganu.
2025 Demand Challenges and CPO-Soybean Oil Dynamics
Demand for palm products remained weak throughout 2025, with Malaysian palm exports registering a 9.5% decline to 15.3 million tonnes. Key markets saw significant reductions, with shipments to China falling by 22.4%, India by 18.6%, and the EU by 10.7%. A contributing factor to this weak demand was the relatively small CPO price discount to US soybean oil in 2025, which inched up to 6.4% from 5.1% in 2024. Despite CPO being cheaper, the price dynamics, coupled with a temporary removal of export duty on Argentinean soybean oil in 4Q2025, led India to shift its purchasing away from CPO.
Near-Term Outlook: Inventory Correction and Demand Recovery
Looking forward, palm stockpiles are anticipated to decline in the first quarter of the year, driven by seasonally weaker production patterns. A potential recovery in demand from India is also expected, following reports that the country has faced delays or cancellations in soybean oil shipments from Argentina due to rising prices, which could prompt a return to palm oil purchases.
Long-Term Drivers: Global Production Trends and Biodiesel Policy
Global palm production is forecast to experience a decline in 2026F. Oil World projects Malaysia’s CPO output to decrease to 19.5 million tonnes from 20.3 million tonnes in 2025, while Indonesia’s production is also expected to edge down from 49.5-50 million tonnes to 49 million tonnes. A significant silver lining for the sector is the impending roll-out of Indonesia’s B50 biodiesel blending policy in 2H2026. This policy is expected to absorb a substantial 33% to 35% of Indonesia’s total CPO production, which could lead to a tightening of global palm supply and support prices. AmInvestment Bank maintains an average CPO price assumption of RM4,400 per tonne for pure Malaysian planters in 2026F.
