KUALA LUMPUR (Oct 11): Malaysian palm oil stocks are expected to remain above the two-million-tonne mark until the end of this year, even when demand is expected to pick up towards the end of the year, as the sector undergoes a peak output season.

As such, analysts covering the industry are maintaining their “neutral” stance on the plantation sector at the moment. The Bursa Malaysia Plantations Index had fallen 4.7% since its year-to-date peak of 7,212.17 on July 26, to Tuesday’s 6,873.64 points.

RHB Investment Bank Bhd in a note on Wednesday said while a pick-up in demand is anticipated due to the upcoming festive seasons, higher competition and the peak output season mean that palm oil stocks would still exceed the two-million-tonne mark, potentially until the end of the year.

“The stock/usage (S/U) ratio is now at 12%, above the 15-year historical average of 10%,” RHB wrote in the note.

Malaysian Palm Oil Board (MPOB) data showed that palm oil stocks exceeded two million tonnes for the second consecutive month in September.

Palm oil stocks rose 9.6% month-on-month (m-o-m) to 2.31 million tonnes in September, the highest level since October 2022 (2.41 million tonnes), due to lower exports and a seasonally higher cropping pattern.

Crude palm oil production (CPO) rose 4.3% m-o-m in September to 1.83 million tonnes, while exports decreased by 2.1% m-o-m to 1.2 million tonnes. The production level was the highest over the past two years, surpassing the previous peak of 1.81 million tonnes in October 2022.

According to MIDF Research, overall palm oil performance in September continued to be supported by improved plantation activities with increased foreign labour on the ground, especially in Peninsular Malaysia, aided by favorable weather conditions.

“Since labour scarcity has steadily decreased, especially in the eastern side area, we think that the Malaysian palm oil stocks will continue to recover to pre-pandemic levels as a result of the better estates activity,” it said.

Hong Leong Investment Bank (HLIB) Research, on the other hand, expects stockpiles to remain flat in October as seasonally higher cropping patterns are expected to be offset by potentially stronger near-term demand for palm oil.

This, the research firm said, is due to palm oil’s improved price competitiveness against fossil fuels, which should boost demand for biofuel if the price spreads between the two remain.

Although the El Nino phenomenon could be a potential catalyst for CPO prices to hit the RM4,200-per-tonne mark in the remaining months, there are concerns that demand could remain fragile due to inflationary pressures brought by high local and global interest rates.

“Furthermore, year-to-date palm oil closing stocks in major importing countries has reached pre-pandemic levels, such as India (4.2 million tonnes) China (5.7 million tonnes), Pakistan (2.7 million tonnes) and Bangladesh (one million tonnes).

“Hence, we anticipate demand would be sluggish in the remainder of the second half (2H2023),” said MIDF Research.

MIDF maintained its full-year CPO price forecast at RM3,800 per tonne. Similarly, RHB kept its CPO projection at RM3,900 per tonne for 2023 and 2024.

Noting that CPO price averaged at RM3,880 per tonne year-to-date, HLIB said it is in the midst of reviewing its 2024 forecast to RM4,000 per tonne.

“We believe seasonally higher cropping patterns for palm, high vegetable stock levels among key consuming countries, and weak near-term demand sentiment will suppress near-term CPO price movement,” it added.