Minsheng Securities: Malaysian production decline, palm oil prices expected to continue to rise

Minsheng Securities released a research report stating that due to severe weather conditions such as heavy rain and flooding in some regions of Malaysia, the country's palm oil production in January was lower than market expectations, with a month-on-month drop marking the largest in nine years. Inventory decreased and prices have started to rise. At the same time, the implementation of the Indonesian B40 directive is expected to boost local palm oil demand, and it is anticipated that the supply and demand of palm oil will tighten, leading to a further increase in prices. Key points from Minsheng Securities: Sharp drop in Malaysian production, reduced inventory leading to price increase Recently, heavy rain in some regions of Malaysia, the world's second largest palm oil producer, has caused flooding and landslides, particularly in the major oil palm growing areas of Sarawak and Sabah states. Due to the impact of heavy rainfall and floods, palm oil harvesting in Malaysia has been hindered. According to data released by the Malaysian Palm Oil Board (MPOB) on February 10, 2025, palm oil supply and demand in January showed a production of around 1.237 million tons, a 16.80% decrease compared to the previous month, marking the largest drop since 2016. This data not only fell below market expectations but also led to a 7.55% decrease in inventory to 1.58 million tons, further exacerbating supply constraints. The difficult harvesting conditions caused by the severe weather also affected exports, with January exports falling by nearly 13% to 1.17 million tons, although slightly higher than market estimates. The low inventory of Malaysian palm oil has already stimulated a rise in local market prices. Against the backdrop of reduced supply, palm oil prices in the Kuala Lumpur market rose by over 5% last week (February 3-9, 2025) and continued to rise by 1% on February 10. Anilkumar Bagani, research director at Mumbai's Sunvin Group, pointed out that with Malaysian palm oil inventory falling below 1.6 million tons, the market is showing a bullish trend. If weather conditions do not significantly improve in the future, palm oil prices may continue to strengthen. Indonesian B40 Directive to drive demand, supply changes also expected The imminent implementation of the Indonesian B40 directive is expected to further boost domestic palm oil demand in Indonesia. On January 11, 2025, the Indonesian government emphasized through the Ministry of Energy and Mineral Resources (ESDM) that the mandatory 40% biodiesel blending rate policy (B40) will be implemented in February 2025. Indonesian biofuel producers estimated that the B40 directive will increase Indonesia's palm oil consumption for biodiesel from 11 million tons in 2024 to 13.9 million tons in 2025, an increase of nearly 3 million tons. Looking at the supply side, Indonesia's palm oil production from January to October 2024 was 43.78 million tons, a 4.40% decrease compared to the same period in 2023. The decrease in palm oil production also affected exports, with Indonesia's palm oil exports from January to October 2024 at 24.836 million tons, a 10.01% decrease compared to the same period in 2023. With palm oil supply and demand tightening, it is recommended to pay attention to related investment opportunities. Investment recommendations: Indonesia and Malaysia are the main global palm oil producers, with the two countries accounting for over 80% of global palm oil production in 2023. With significant declines in Malaysian palm oil production in January 2025 and the imminent implementation of the Indonesian B40 policy, the two primary producing countries are expected to face a balance between palm oil supply and demand, resulting in a tightening of palm oil exports and a further increase in prices. As global palm oil production is concentrated, palm oil is also an important pillar industry for the originating countries. The originating countries generally adjust palm oil prices by increasing or decreasing export taxes to smooth inventories and protect their domestic industries. It is recommended to focus on Zanyu Technology Group (002637.SZ), a company that has established factories in Indonesia, the originating country. The company's overseas oil base is located in the bonded zone of Jakarta, the capital of Indonesia, and has significant advantages in palm oil procurement prices, convenience, transit time, tax policies, transportation costs, and production costs. The current production capacity of the company's production base in Jakarta, Indonesia, is 700,000 tons per year. With the base in Jakarta, the company can obtain stable raw materials at competitive prices and has cost advantages in local procurement. After processing palm oil into oleochemicals in Indonesia, the company can avoid the impact of export restrictions. With the enhanced restrictions on Indonesian palm oil exports and prices consistently at a high level, the company's advantage in establishing factories in Indonesia will become more prominent. Risk warning: Downstream palm oil demand falls short of expectations, changes in palm oil export policies in producing countries pose risks.