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News Admin
 
Date
 31/12/2020
News Provider
 Nur Aisha Abd Wahab
News Source
 The Malaysian Reserve
Headline
 Prices, low inventory support palm oil in 2020

The Malaysian Reserve (31/12/2020) - MALAYSIA’S Movement Control Order (MCO) had restrained the country’s economic activities, including the palm oil industry despite its importance in the food industry.

Compared to 2019, Malaysia’s crude palm oil (CPO) production was one million tonnes lower this year for the eleven-month period at 17.8 million tonnes due to the shortage of workers and seasonal weather pattern.


The tight production lowered Malaysia’s stockpile and pressured the palm oil prices to rise to an eight-year high.


The Malaysian Reserve looks at the contributing aspects that influenced the palm oil sector this year.


Estate Lockdown


As the Covid-19 virus spreads to the rural side of the country, the government instructed estate plantations to halt operations to contain the spread of the virus among plantation workers.


The Sabah state government ordered the palm oil operations in six areas — Tawau, Lahad Datu, Kinabatangan, Kalabakan, Semporna and Kunak — to be temporarily closed, leading to an exodus of estate workers as the shutdown left them with no pay.


The decision was opposed by the industry players, as delays in the harvesting activities would disrupt the quality of the fruit bunches.


According to industry players, harvesters have a limited timeframe to collect the fruit bunches once ripened, while any delay will degrade the volume and quality of the extracted oil.


It became a genuine concern for the industry players as Sabah accounts for 75% of the palm oil production in Malaysia.


The government also banned the hiring of foreign workers to curb the inflow of Covid-19 cases in the country, leaving industries such as plantation, manufacturing and construction with severe lack of employees.


Supply and Demand Boost Prices


CPO prices have been climbing since May due to thin supply, reaching a year high of about RM3,854 for the generic palm oil futures last week.


Malaysian Palm Oil Board’s benchmark price traded at RM3,701, representing a nine-year high.


The price rally was good news to planters as the crude vegetable oil had been at a low level in the first three months of the MCO.


Analysts believe the rise was due to the tight supply caused by the harvest interruption and increasing demand, particularly from the hotel, restaurant and conference (Horeca) sector.


The country’s stockpiles of CPO also dropped to a new low at 1.56 million tonnes in November, further boosting its prices this month.


The declining trend is divergent from palm oil stocks’ 10-year historical trend where the inventory rose by an average of 3.5% on monthly comparison in November, said CGS-CIMB Securities Sdn Bhd analysts Ivy Ng and Nagulan Ravi.


“The stock is also 1% and 2% above Bloomberg consensus and Reuters’ poll estimates respectively.


“The stockpile remains low compared to historical levels, while the average palm oil stock level in Malaysia at the end of November for the past 10 years has been around 2.3 million tonnes.


“The tight palm oil stockpile level and Indonesia’s revised export levy will likely continue to support CPO prices,” the analysts said.


Besides the shortage of workers, palm oil’s lower production for the season is also affected by the cyclical dry weather pattern, La Nina.


Although the wet weather has little effect on the condition of the palm trees compared to El Nino — the hot weather pattern, the heavier than usual rainfall will most likely slow the fruit collecting process and affect the yield volume for the month.


Tax Exemption Supports Export


In June, the government introduced a tax exemption under the short-term National Economic Recovery Plan, or Penjana, to lift the slump in global palm oil demand, boost exports and bring down the palm oil inventory.


The exemption includes import duties reduction to 0% on CPO, crude palm kernel oil and processed palm kernel oil beginning July 1 to Dec 31 this year.


The policy also came at the perfect timing following India’s interest to increase its palm oil imports to 1.14 million tonnes of vegetable oil in June from the April-to-May monthly average of 865,000 million tonnes.


Outlook for 2021


Analysts believe the strong CPO price momentum will sustain at above the RM3,000 per tonne mark in the first quarter of 2021 (1Q21) before it softens beyond the quarter.


Hong Leong Investment Bank Bhd analyst Chye Wen Fei said the momentum is expected to be disrupted by the better supply of other major edible oils of which will result in a more balanced demand-supply dynamic.


“CPO prices will likely remain elevated until 1Q21, supported by the concerns on palm supply tightness in both Malaysia and Indonesia, La Nina phenomenon, which has resulted in slow soybean planting progress in Brazil, and lower soybean yield in the US.


“The low inventory level for edible oil in major edible oil-consuming countries, which will continue to underpin demand for edible oils including palm oil, also contributes to the declining momentum,” Chye said.


Chye said the research house has raised its average CPO price assumptions to RM2,700 per tonne from RM2,350 per tonne for 2020 and RM2,400 per tonne for 2021 to 2022, maintaining its ‘Neutral’ rating on the sector.


AmInvestment Bank Bhd analyst Gan Huey Ling said the plantation industry will see balanced contributing factors in 2021 with the influences slanting more towards the downside risks.


“We think for a CPO price of more than RM3,500 per tonne, there are more downside risks instead of upside.


“We reckon the palm oil industry would rebound in 2021 after sliding in 2020. CPO output was weak in Malaysia and Indonesia in 2020, dragged by the lagged impact of the drought and haze, which took place in 3Q19,”


Gan added that the supply-demand fundamentals for palm oil will recover, particularly on the increasing demand from the Horeca sector which will be supported by the higher CPO production in both Malaysia and Indonesia.


“Malaysia’s CPO production is expected to inch up in 2021.


“Currently, the production is forecast to rise to 19.5 million tonnes in 2021 from about 19.3 million tonnes in 2020.


“We believe the unexciting CPO output in 2021 is premised on the fact there is a shortage of foreign labour in Malaysia presently. The impact of a reduction in fertiliser application by smallholders in 2019 may continue in 2021,” Gan said.


Gan added that China, Malaysia’s biggest importer of palm oil, is expected to continue restocking next year with a higher volume exceeding the imports in 2020.


“We believe China would continue restocking palm oil in 2021 and exceed the 2020’s level of about six million tonnes.


“In 2019, about 22.2% of palm oil was used in the oleochemical industry in China, while another 20.8% was used by instant noodle companies.


“An additional 20.8% of palm oil was used by the catering industry in China, while the remaining 57% was used in the food processing, solid fats and biodiesel industries,” Gan said.


China’s demand for commodities has been robust this year as it has been purchasing various soft commodities after the country ended its lockdown in Wuhan on April 8, 2020.


Read more at https://themalaysianreserve.com/2020/12/31/prices-low-inventory-support-palm-oil-in-2020/



ECONOMICS & INDUSTRY DEVELOPMENT DIVISION
Malaysian Palm Oil Board ( MPOB ) Lot 6, SS6, Jalan Perbandaran, 47301 Kelana Jaya, Selangor Darul Ehsan, MALAYSIA.
Tel : 603 - 7802 2800 || Fax : 603 - 7803 3533