The Borneo Post (12/03/2020) KUCHING: Crude palm oil (CPO) prices will likely remain under pressure as the several factors, including the Coronavirus Disease 2019 (Covid-19) outbreak, are expected to continue limiting demand in the coming months.
In a sector update, the research team at MIDF Amanah Investment Bank Bhd (MIDF Research) believed that there are several factors at play to keep demand under pressure in coming months.
“The worsening Covid-19 outbreak that is causing a slowdown in business activities, logistical constraints and restricted travelling will continue to put a dent in CPO demand from major economies such as China and European Union (EU),” it said.
Furthermore, while India has decided not to extend the safeguard duty of five per cent on certain palm oil varieties from Malaysia which could provide slight relief, the research team believed that the positive impact would be minimal.
“This is due to the India ban on Malaysian refined palm oil which previously made up the majority of the export to India. In addition, the demand for CPO as feedstock will be met with resistance as the current price is becoming unattractive as compared to soybean oil and gasoil.
“This will cause buyers and consumers to switch to other substitute oils as a cheaper and more appealing alternative,” it added.
In February 2020, MIDF Research noted that the average CPO spot price retreated by 10 per cent month-on-month (m-o-m) to RM2,410 per metric tonne (mt) level, primarily in view of the worsening coronavirus outbreak to other major economics other than China as well as the continued low export demand from India.
“However, on a year-over-year basis, the spot price increased by 27 per cent y-o-y, in anticipation of the lower stockpiles level, tighter production and lower supplies in the export market. While the market anticipates tighter supplies due to the higher domestic consumption via higher biodiesel mandate in both Malaysia and Indonesia, we opine that the recent tumble of gasoil to have a negative impact on CPO demand and feasibility as a biodiesel feedstock from a financial standpoint,” it said.
MIDF Research noted that the palm oil is currently trading at a huge premium to gasoil of about US$197 per mtvs average discount of US$19 per mt in the past year.
“On a positive note, we posit that the lower inventory level and moderated output level to partially support CPO price and the year-to-date CPO price remains elevated at about RM2,800 per mt.
“The current spot price is on a downtrend, falling to about RM2,270 per mt due to negative sentiments on the weakening export demand ahead and expected higher CPO production.
“Moving forward, we do not expect significant reduction in inventory level as the higher production cycle kicks in. In addition, we also expect export to contract due to challenges faced in the country’s two main export markets such as India and China,” it opined.
On another note, it also pointed out that there is concern that the elevated CPO price will lose its appeal as feedstock for biofuel as the CPO price is trading at a huge premium against the latter.
“Nonetheless, the current year-to-date CPO spot price remains elevated at about RM2,800 per mt. This was mainly driven by weaker CPO production and lower opening stock which has led to lower stock level.
“This could provide some slight reprieve to the CPO price. Meanwhile, the restocking activities ahead of the major Ramadan festival could partially support export demand,” it added.
On Malaysia’s exports of palm oil in February 2020, it noted that export dropped by 18.1 per cent y-o-y to about 1.1 million mt, mainly stemmed from the sharp drop in export demand from India (down 95.3 per cent y-o-y), Pakistan (down 39.6 per cent y-o-y) and EU (down 19.8 per cent y-o-y). This also came in below the consensus’ expectation by 1.6 per cent.
“The plunge in export demand from India continues to be a major concern for the Malaysian palm oil market as India used to be the largest export market, accounting for about 25 per cent of total export.
“Unfortunately, that number has fallen to approximately three per cent as of February 2020 since India had called for a ban on Malaysian refined palm oil due to political factor.
“The fall in EU export could be a sustained trend as the EU continues to call for the ban of palm biodiesel under the Delegated Act II and 3MCPG (3-monochloropropanediol) issue,” it explained.
“Nonetheless, we are of the view that the upcoming Ramadan festival would partially support the demand through restocking activities and higher consumption,” MIDF Research said.
Read more at https://www.theborneopost.com/2020/03/12/cpo-price-to-remain-under-pressure-as-covid-19-outbreak-weakens-demand/