Malaysian palm oil inventories expected to peak in October

Malaysian palm oil inventories are projected to hit their highest level since 2018 in October, following six consecutive months of growth in September. Public Investment Bank Bhd (PublicInvest) attributes this surge to weaker demand from key markets like China, Europe, and the Middle East, combined with a preference for cheaper Indonesian crude palm oil (CPO). In August, Indonesia's palm oil exports surged 35% month-on-month, while Malaysia's exports declined.

PublicInvest anticipates that Malaysia's palm oil inventory cycle will begin declining from November, with a more significant reduction expected by mid-2027 due to El Niño's delayed impact on fresh fruit bunch (FFB) yields and CPO production. A sustained drop in inventories could revive CPO prices, which have averaged RM4,430 per tonne year-to-date and are expected to approach PublicInvest's full-year forecast of RM4,500 per tonne.

The bank maintains an "Overweight" rating on the plantation sector, highlighting potential disruptions from El Niño and rising crude oil prices. While near-term sentiment is dampened by high inventories and falling CPO prices, PublicInvest believes the outlook could improve as inventories peak and El Niño's effects on production become apparent. A stronger El Niño could further tighten global vegetable oil supplies, boosting CPO prices.

Additionally, Indonesia's planned B50 biodiesel mandate is expected to enhance domestic CPO demand and reduce export availability, providing another demand catalyst. PublicInvest recommends Sarawak Plantation Bhd and Ta Ann Holdings Bhd as top picks, citing their attractive valuations, earnings growth potential, and strong exposure to an anticipated improvement in the CPO cycle.