Palm oil inventories peak as CPO prices near turning point
Malaysian palm oil inventories are expected to reach their peak in October after six consecutive months of growth, potentially signaling a shift in crude palm oil (CPO) prices. Public Investment Bank Bhd (PublicInvest) forecasts inventories to surpass three million tonnes in September, the highest level since 2018, due to weaker demand from key markets like China, Europe, and the Middle East during the high production season. The demand has also shifted towards cheaper Indonesian CPO, as evidenced by Indonesia's 35% month-on-month increase in palm oil exports in August, while Malaysia's exports declined.
PublicInvest anticipates a downward trend in Malaysia's inventory cycle from November, with a more significant reduction expected in mid-2027. This decline is attributed to the lagged impact of El Niño on fresh fruit bunch (FFB) yields and CPO production. A sustained decrease in inventories could provide a stronger fundamental basis for a recovery in CPO prices, which have averaged RM4,430 a tonne year-to-date and are projected to align with PublicInvest's full-year assumption of RM4,500 a tonne.
The firm maintains an "Overweight" stance on the plantation sector, citing potential weather disruptions from El Niño and sustained strength in crude oil prices. While near-term sentiment is weighed down by the recent correction in CPO prices and elevated inventories, the outlook may improve as inventories peak and El Niño's impact on production becomes more evident. A stronger-than-expected El Niño could tighten the global vegetable oil balance, supporting CPO prices. Additionally, higher crude oil prices could enhance the competitiveness of palm-based biodiesel, boosting demand.
Indonesia's planned B50 biodiesel mandate is expected to further support CPO demand by increasing domestic consumption and reducing export availability. PublicInvest recommends Sarawak Plantation Bhd and Ta Ann Holdings Bhd as preferred stocks, citing their attractive valuations, earnings growth prospects, and exposure to an anticipated improvement in the CPO cycle.