Palm Oil Prices Plunge to 7-Month Low: A Closer Look at Production and Inventory Pressures

Palm oil futures have hit their lowest price in seven months, closing at RM3,940 per metric ton in late April 2025—marking a 10% decline since early April—amid surging production and rising inventory levels. This downturn reflects a complex interplay of supply-side dynamics, shifting demand patterns, and global policy shifts. Let’s dissect the factors driving this market correction and its implications for investors.

Current Market Dynamics: Supply Outpacing Demand

The immediate catalyst for the price drop is Malaysia’s March 2025 production surge, which rose 16.8% month-on-month to 1.38 million metric tons. This rebound followed delayed February harvests caused by flooding, which had kept production artificially low earlier in the year. While this increase aligns with seasonal trends—typically production peaks in September-October—the sudden surge overwhelmed export capacity and pushed inventories higher.

Key Data:
- March 2025 palm oil stocks rose to 1.56 million tonnes, ending six consecutive months of decline.
- Cumulative Q1 2025 production, however, remains the lowest in three years, with annual output projected to fall to 19 million tonnes—a drop of 1.5% from 2024.

This mixed picture highlights a critical imbalance: while short-term production has rebounded, structural challenges like aging plantations and labor shortages in Sabah (which saw a 10% year-on-year output decline in Q1) are capping long-term growth.

The Inventory Overhang

The inventory build-up is exacerbating price pressure. March’s stockpile increase contrasts with the 1.51 million-tonne low in February, which had briefly supported prices. Now, traders are pricing in the risk of further accumulation as production recovers.

Why It Matters:
- Higher stocks reduce the urgency for buyers to purchase, especially with global demand growth slowing.
- The price drop to RM3,940 has narrowed the gap with soybean oil prices (around USD920/tonne), making palm oil cost-competitive but failing to spark a buying frenzy due to macroeconomic headwinds.

Demand Challenges: India’s Retreat and China’s Hesitation

Key importers are not yet stepping up purchases to absorb the oversupply:
1. India: Palm oil imports fell 14% year-on-year in March to 424,600 tonnes, as refiners pivot to cheaper soybean and sunflower oils. This shift has left India’s edible oil inventories at a six-month low of 1.67 million tonnes, but buyers remain hesitant to restock amid weak refining margins.
2. China: While China’s palm oil imports rose 14% in March, this rebound is insufficient to offset India’s decline. Analysts expect stronger demand in May-June as summer consumption picks up, but this remains speculative.

Policy and External Risks

• Indonesia’s B40 Mandate: The country’s plan to boost biodiesel blends to 40% palm oil by 2025 could eventually tighten global supply. However, this has yet to materialize, as domestic consumption absorbs most of the production.
• U.S. Tariffs: A 32% tariff on palm oil imports continues to redirect trade flows toward Asia, but this has not spurred enough demand to offset the oversupply.
• Crude Oil Prices: Weak crude prices (down to $64.5/barrel in April) reduce biodiesel’s cost advantage, further dampening palm oil’s appeal as a feedstock.

Structural Weaknesses: Beyond the Short Term

While the current price slump is supply-driven, long-term risks linger:
- Weather and Labor: Persistent rainfall in early 2025 and labor shortages in Sabah could disrupt production again, but these factors are already priced into the market.
- Replanting Delays: Malaysia replanted only 132,000 hectares of oil palms in 2023—far below its 4% annual target—raising concerns about future supply stability.
- EU Regulations: The delayed implementation of the EU Deforestation Regulation (EUDR) could introduce compliance costs, potentially shrinking export volumes to Europe.

Conclusion: A Bearish Near Term, but Risks Ahead

Palm oil prices are under pressure due to a temporary oversupply caused by Malaysia’s March production rebound and rising inventories. The current price of RM3,940/tonne reflects this imbalance, with further downside risks if exports fail to accelerate. However, investors should note:
1. Price Floor Support: The RM3,900 level is a key psychological and economic threshold, as palm oil becomes cost-competitive with soybean oil here.
2. Demand Catalysts: China’s summer restocking and Indonesia’s B40 mandate could stabilize prices by mid-2025.
3. Structural Risks: Aging plantations and replanting delays may limit long-term supply growth, supporting prices over time.

Final Take: While the near-term outlook is bearish, the market remains vulnerable to supply shocks (e.g., weather disruptions) and policy shifts. Investors should monitor Malaysian export data, Indonesian biodiesel policies, and crude oil prices closely. For now, the focus is on whether demand can catch up with the current oversupply—a race that will determine palm oil’s path in the coming months.

Data sources: Malaysian Palm Oil Board (MPOB), Reuters, and industry analyses.