Malaysia's palm oil output may taper off in coming months, weakening export demand expected too

KUALA LUMPUR: Malaysia's palm oil production is expected to taper off in the coming months, but weakening demand in the export market may be likely given the high stock levels.

RHB Research said this could mean that the local stocks would still exceed two million tonnes potentially until year-end at least.

The country's palm oil stocks rose 5.8 per cent month-on-month (MoM) to 2.45 million tonnes in October as output and exports rose 5.9 per cent and 21 per cent MoM.

RHB Research said the probability of a strong El Nino is at 60 per cent currently, with the median Nino 3.4 Index forecast at 1.9, according to the Australian Bureau of Meteorology.

However, the US National Oceanic and Administrative Administration said El Nino conditions had plateaued in mid-October at the level of a moderate El Nino event.

"According to Indonesia's weather bureau, rainfall in parts of Sumatra and Kalimantan have already been declining since July, which could result in delayed crop ripening.

"This could mean that Indonesian production may see 2023's peak output being delayed to 2024.

"The firm noted that production in Indonesia has already declined 11.5 per cent MoM in August.

Overall, it still expects El Nino to impact productivity more significantly from late 2Q24, thereby pushing estimated crude palm oil prices higher in the second half of 2024.

Crude oil prices have fallen 16 per cent in the last four weeks, despite continued geopolitical tensions.

As a result, the palm oil-gas oil (POGO) spread has gone back to being negative, thereby reducing chances of discretionary biodiesel demand of 2.5 million-3.0 million tonnes returning to the market.

RHB Research maintained its "Neutral" call on the sector with a tactically positive trading strategy retained.

There is no change to its RM3,900 per tonne CPO price assumptions for 2023 and 2024.

The firm also continued to prefer Malaysian players over their regional peers.

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