The key takeaway from the latest report is that, despite stronger-than-expected domestic consumption, weak export demand and increased imports have led to another sequential rise in domestic stockpiles. The producing region must address the persistent issue of high inventory levels.

Analysis of the June MPOB Supply and Demand Report

The Malaysian Palm Oil Board (MPOB) released its monthly supply and demand report for June this past Friday. The data showed a month-on-month production increase of 8.1% to 1.639 million tonnes. Imports surged to 103,000 tonnes, while exports rose 6.2% to 1.204 million tonnes. Domestic consumption saw a significant jump of 37.5% to 422,000 tonnes. Consequently, ending stocks increased by 4.8% to 2.544 million tonnes.

Compared to prior market estimates, the main deviations in this report were higher imports and weaker export demand. Although these were partially offset by unexpectedly strong domestic consumption, the closing stockpile still exceeded the upper range of market forecasts, rendering the report overall bearish.

Supply Side Analysis

On the supply side, June's production increase of 8.1% exceeded the historical average sequential growth for the same period. This was primarily due to a relatively low base in May, which is typically the second month of weaker output following the end of Ramadan. The June production rise was largely anticipated, with earlier guidance from MPOA and UOB providing a general indication. From an absolute value perspective, current production levels are high. Cumulative production from January to June reached 9.023 million tonnes, second only to 2020, suggesting that Malaysian output still maintains a growth momentum.

Regarding weather, total rainfall across Malaysia in June decreased slightly to 280mm but remained above the highest level recorded for June in the past decade. Rainfall in the Johor region persisted at extremely high levels, with no areas in Malaysia experiencing prolonged dryness recently. For the medium to long term, the market is focused on the strong El Niño forecast for the third and fourth quarters. So far, rainfall in Southeast Asia has not been impacted. Market participants will monitor subsequent rainfall patterns, with the current contango structure already pricing in a weather-related risk premium.

Demand Side Analysis

Looking at export demand, June exports rose 6.2% month-on-month. This month does not exhibit strong seasonal patterns, so export demand largely depends on price competitiveness during the prior booking period. By June, FOB palm oil prices had declined relative to March and April, so an improvement in demand was within market expectations. However, the sequential increase fell notably short of the prior estimates from Bloomberg and Reuters. Recently, Southeast Asian palm oil has become more price-competitive compared to Argentine soybean oil, which is expected to support an improvement in export demand.

On the domestic consumption front, usage surged to 422,000 tonnes this month. The market largely attributes this significant driver to the implementation of the B15 mandate in June. However, this policy alone is unlikely to account for such a pronounced increase. Some market participants estimate that, given high inventory levels and lackluster export growth, a portion of palm oil may have flowed into domestic distribution channels. It remains to be seen whether consumption will sustain these elevated levels following the B15 rollout.

Summary and Outlook

Regarding inventory, stocks increased 4.8% sequentially to 2.544 million tonnes, marking the third consecutive monthly rise. The market is feeling the pressure from increasing Malaysian production and stockpiles. Malaysia needs to manage inventories ahead of the peak production months to avoid a repeat of last year's inventory trajectory.

In conclusion, this report is viewed as bearish. While domestic consumption significantly exceeded expectations, surpassing even the estimated boost from B15, export demand remains insufficiently robust. The producing region still needs to stimulate palm oil demand through improved price competitiveness. Until the El Niño phenomenon materially leads to drier conditions in Southeast Asia, prices in the producing region are expected to remain under pressure.