KUALA LUMPUR (Feb 14): The expected decrease in palm oil production in the upcoming months, coupled with a surge in demand from the export market, has the potential to push Malaysian palm oil stocks below the two million-tonne mark by next month, which could contribute to an upswing in crude palm oil (CPO) prices.

According to data from the Malaysian Palm Oil Board, Malaysia's palm oil stocks for January reached a six-month low of 2.02 million tonnes, which is below the market's estimated 2.09 million tonnes, due to lower output and exports. 

In a recent note, RHB Research highlighted that while palm oil production is expected to decrease in the coming months, there is anticipation of a resurgence in the export market demand, likely due to the upcoming Aidilfitri festivities and restocking activities, leading to further depletion of stock levels.

“With this, January’s annualised S/U [stock/usage] ratio is now 10.3%, slightly above the 15-year historical average of 10%. We expect stock levels to continue declining as production falls due to the low output season while exports improve from seasonal demand,” it said. 

Likewise, Maybank Investment Bank Bhd said the CPO prices may briefly go above RM4,200 per tonne in the coming months, based on the expectation that the stockpile will ease below two million tonnes by the end of February. 

“We reckon that if February exports can be sustained around 1.1-1.2 tonnes [considering the shorter calendar month], there will be further inventory drawdown to below two million tonnes by end-Feb. This will help further strengthen CPO price in the short term on tightness in supply. 

“Thereafter, CPO price should trend lower by mid-2024 due to availability of new South American harvests, and anticipation of CPO output recovery in 2H2024,” Maybank said in a separate note. 

MIDF Amanah Investment Bank Bhd anticipates that the average local CPO delivery prices will see a month-on-month increase of 4.8%, closing at RM3,900 per tonne next month, attributed to the impact of developing mild El-Nino events. Looking ahead, the research house forecasts a potential CPO price range of RM3,600 to nearly RM4,500 per tonne in the second half of the year.

Despite these projections, investment analysts are currently maintaining a "neutral" stance on the industry. Ta Ann Holdings Bhd and Sarawak Oil Palms Bhd (SOP) are highlighted as top picks by the analysts.

At the time of writing, the Bursa Malaysia Plantation Index had declined by 0.55%, falling 40.19 points to 7,236.44. Ta Ann’s share price slipped 0.53% to RM3.72, giving it a market capitalisation of RM1.65 billion. SOP rose 0.37% to RM2.73, valuing the group at RM2.43 billion. 

International climate model forecasts suggest that the El Nino has peaked and is currently on a declining trend, expected to return to neutral levels by May. 

Moving forward to July-September, RHB indicates that La Nina is becoming the most probable category with a likelihood of 58%. 

“As the last “triple-dip” years of La Nina in 2020-2023 were moderate events, there is a chance that 2024’s La Nina could be strong. 

“While the impact of La Nina on palm production is not normally significant, we saw the last three back-to-back years of La Nina having an impact, ranging from extreme rainfall and flooding in Australia, prolonged droughts in Africa, and the exceptional drought in southwestern US,” said the research house. 

“We would therefore need to monitor the severity of this La Nina and its impact on other crops,” it added.