1. Expectations for Malaysian Palm Oil Inventory Drawdown Fully Priced In

The MPOB report released at noon on February 10 showed Malaysian palm oil production declined while exports increased. Inventory ended its 10-month consecutive growth streak with a larger-than-expected drawdown.

Overall Malaysian palm oil supply and demand improved in January. Production: Malaysian palm oil production continued its downward trend in January, falling by a significant 13.78%. Despite three consecutive months of decline, January output remained the highest in nearly seven years, following October's record high of 2 million tons. This development had a neutral impact on the supply side. Exports: Malaysian palm oil exports grew for the second consecutive month, with January's export growth rate of 11.44% accelerating further from December's pace. On one hand, January palm oil prices were lower than competing soybean oil. India's soybean oil imports were unprofitable, with soybean oil import costs exceeding palm oil by over $100/ton. Refineries increased palm oil procurement, with India's palm oil imports from Malaysia rising 24% month-on-month in January to a four-month high. Total palm oil imports in January surged 51% month-on-month to 766,000 tons. With pre-Ramadan stockpiling demand persisting, India's palm oil imports are expected to rise further in February. High-frequency data indicates that India's palm oil imports from Malaysia during the first ten days of February increased another 11% month-on-month. Meanwhile, Indonesia announced a 12.5% increase in its palm oil export tax effective March 1. Buying activity in export markets ahead of the tax hike boosted palm oil exports from producing regions in January and February. Additionally, Indonesia's new tax policy indirectly stimulated demand for Malaysian palm oil exports. Malaysian palm oil exports are expected to remain robust in the near term, potentially accelerating inventory drawdowns. Inventories: Supply contraction meets demand growth. January marked a turning point for Malaysian palm oil inventories, with a 7.72% decline exceeding market expectations, signaling overall improvement in Malaysian palm oil supply and demand dynamics.

2. Indonesia's palm oil market maintains tight supply-demand conditions with no significant bullish or bearish drivers in the near term.

In 2025, Indonesia's robust demand for biodiesel and exports will drive palm oil inventories below 2.5 million tons, maintaining overall tight supply-demand conditions. On the production side, following the confiscation of 3-4 million hectares of illegal plantations in 2025, Indonesia plans to seize another 4-5 million hectares of illegal plantations in 2026. Additionally, 28 permits were revoked at the beginning of the year, indicating stricter production-side regulation. further constraining palm oil output. GAPKI projects Indonesia's crude palm oil production to grow by 8% in 2025, but only 2-3% in 2026. On the consumption side, indications suggest Indonesia will continue its B40 biofuel mandate in 2026, maintaining robust demand for biodiesel feedstock. Concurrently, Indonesia raised its palm oil export levy to 12.5% effective March 1st, further bolstering the biodiesel subsidy fund. Furthermore, reports indicate Indonesia plans to ban exports of palm oil mill effluent and used cooking oil to prioritize domestic biodiesel and aviation fuel production. Given this, the possibility of Indonesia reintroducing or even implementing B45 or B50 cannot be ruled out, though current policy lacks clear bullish or bearish drivers.

3. Policy Divergence Between US and Europe

The US has published proposed regulations for its 45Z biodiesel policy, awaiting final implementation. The latest biofuel proposal reiterates the emphasis on North American origin for feedstocks and prohibits the use of palm fatty acid distillates in SAF production. This policy benefits North American feedstocks and boosts global oil demand. However, increased consumption of soybean, rapeseed, and corn oils for biodiesel in North America creates a gap in edible consumption that must be filled by other crops, which also supports consumption of palm oil and similar products.

However, on February 10, the European Commission launched a public consultation on a draft amendment to Delegated Regulation (EU) 2019/807, which proposes phasing out biofuels produced from palm oil and soybean oil. The bill stipulates that the share of palm oil and soybean oil biofuels eligible for energy consumption credits will be progressively reduced: to 71.4% by 2025, 42.8% by 2027, and 14.3% by 2029. Starting in 2030, only rapeseed oil biofuels will be eligible for quota inclusion. The EU's policy to phase out biofuels made from soybean and palm oil negatively impacts palm oil in terms of both short-term sentiment and long-term actual demand.

4. Domestic holidays approach, market trading remains subdued

With the Spring Festival approaching, downstream stockpiling has largely concluded, resulting in overall sluggish spot trading for edible oils. Unlike the previous trend where downstream stockpiling drove sustained inventory drawdowns for soybean and rapeseed oils, palm oil inventories have continued to accumulate under essential consumption, reaching a high of 750,000 tons. Additionally, as the holiday approaches, funds are exiting for risk avoidance, leading to subdued market activity (daily palm oil trading volume has dropped from 760,000 lots in late January to the current 300,000-400,000 lots, while open interest has fallen from 650,000 lots in late January to the current 550,000 lots).

Overall, Malaysia's inventory drawdown expectations have materialized, while the positive impact of U.S. biodiesel prices remains limited. The EU's phasing out of biodiesel policies using soybean and palm oil as feedstocks further constricts overseas demand for palm oil.

As an integrated internet platform providing benchmark prices, on February 12, the SunSirs palm oil benchmark price was 8,870.00 RMB/ton, a decrease of 3.55% compared with the beginning of the month (9,196.00 RMB/ton).

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