TSH: Palm Oil Sector Navigates Rising Stockpiles and Soft Demand

The Malaysian palm oil sector is grappling with a significant build-up in crude palm oil (CPO) stockpiles, which surged above the 3 million tonne mark in December for the first time since February 2019. This increase, largely driven by weaker demand, occurred despite a month-on-month decline in CPO production, coming in above market expectations.

Production and Inventory Review

According to the Malaysian Palm Oil Board (MPOB) data, CPO production in December fell 5.5% month-on-month (MoM) to 1.83 million tonnes. Despite this seasonal moderation, output remained robust on a year-on-year (YoY) basis, rising 23.1%. The MoM decline was broad-based, attributed to weaker Fresh Fruit Bunch (FFB) yields across all regions. For the full year 2025, total CPO production increased 4.9% YoY to 20.28 million tonnes, with an average yield of 17.75 tonnes per hectare, surpassing pre-pandemic levels. However, December’s stockpiles soared 7.6% MoM and a substantial 78.5% YoY to 3.05 million tonnes, indicating persistent supply overhang.

Demand Dynamics

Export activity showed some improvement in December, rebounding by 8.5% MoM to 1.32 million tonnes after a sharp drop in November. Nevertheless, full-year 2025 exports recorded a 9.7% YoY decline to 15.26 million tonnes, weighed down by softer global demand and lingering market uncertainties. Domestic usage, while falling 20.8% MoM in December to 332,000 tonnes, saw a sharp 35.8% YoY increase for the full year 2025, reaching 4.44 million tonnes. Early January 2026 data from cargo surveyors indicate a surge in palm oil shipments, likely driven by aggressive front-loading from China ahead of the Lunar New Year and restocking by Indian refiners. Meanwhile, soybean futures have remained bearish, impacted by the imminent arrival of large Brazilian supplies and rising global inventories, limiting CPO price rebounds.

Outlook and Investment Recommendations

Looking ahead, CPO production is expected to ease further in the first quarter of 2026 due to seasonal factors before gradually recovering in the second quarter. CPO prices are anticipated to stay range-bound at RM3,900-RM4,200/tonne in 1Q 2026, with an average forecast of around RM4,000/tonne for the full year 2026, unless stronger-than-expected exports or production shocks push prices higher.

TA SECURITIES maintains its NEUTRAL stance on the Plantation sector. Key upside risks to this recommendation include a potential for lower-than-expected South American soybean supply, a more promising demand recovery, lower-than-expected palm oil production, and significant reductions in production costs.

The firm has issued specific recommendations for individual companies within the sector:

• BUY ratings are maintained for KLK (TP: RM23.09), TSH (TP: RM1.43), and UMCCA (TP: RM6.72).
• A HOLD rating is maintained for KIML (TP: RM2.47).
• IOI Corp (TP: RM3.97) receives a SELL rating.
• SDG (TP: RM5.63) has been downgraded from Hold to SELL, following a recent rally in its share price that has reduced its upside potential.