TSH: Palm Oil Sector Sees Stockpile Drawdown Amid Mixed Production and Export Trends

TA Securities maintains a Neutral stance on the Plantation sector, following a January report highlighting significant movements in crude palm oil (CPO) production, stockpiles, and exports. The month saw the first drawdown in CPO inventories in over ten months, driven by robust exports despite a seasonal decline in production.

Performance Review

CPO production in January experienced a seasonal downturn, declining 13.8% month-on-month (MoM) to 1.58 million tonnes from its year-end peak. While this figure was below market expectations, production remained robust on a year-on-year (YoY) basis, increasing by 27.2% due to a low base effect. The MoM contraction was primarily yield-driven, with fresh fruit bunch (FFB) yields moderating across most regions, particularly in Peninsular Malaysia and Sarawak.

In a significant development, CPO stockpiles fell 7.7% MoM to 2.82 million tonnes in January, marking the first reduction after ten consecutive months of increase. However, despite this drawdown, inventories remained substantially higher by 78.1% YoY, underscoring the persistent issue of an elevated stock overhang. The inventory levels were largely in line with expectations, primarily due to the combination of lower production and a notable surge in exports.

Exports showed strong momentum, rising 11.4% MoM to 1.48 million tonnes and accelerating 25.8% YoY. This performance surpassed expectations, bolstered by firmer demand and improved shipment momentum early in the year. Concurrently, domestic usage increased 14.5% MoM to 361k tonnes, while imports saw a slight decrease of 2.9% MoM.

Future Outlook and Price Dynamics

TA Securities assesses the January data as mildly bullish for short-term CPO prices. However, the potential upside is expected to be moderate given that inventories remain elevated and production levels are still firm, suggesting that supply pressure could re-emerge once seasonal output normalises. The investment bank anticipates CPO prices to stay range-bound between RM3,900 and RM4,200 per tonne in the first quarter, unless unforeseen stronger-than-expected exports or significant production shocks push prices higher.

Looking ahead, CPO production is projected to remain subdued in the first quarter, aligning with seasonal patterns and softer FFB yields. A gradual recovery is anticipated from the second quarter onwards as harvesting conditions improve.

The sector faces ongoing demand headwinds. While global oilseed prices have strengthened, led by a rebound in Chicago soybean futures, the upside is likely to be capped by record Brazilian supply. China’s palm oil demand is weakening as buyers increasingly shift to cheaper alternatives, and India’s palm oil imports, though expected to recover from 2025 lows in 2026, could see some demand diverted by rising US soybean oil competitiveness.

Key upside risks to the sector’s recommendation include a lower-than-expected soybean supply from South America, a more promising demand recovery, lower-than-expected palm oil production, and significant reductions in production costs.