S&P Global (03/09/2019) - Singapore — Falling CPO prices coupled with rising gasoil had opened up the PO-GO spread -- the difference between front month gasoil and palm oil futures -- to minus $140s levels in March, which allowed for discretionary blending.
With the floodgate opened, a total of 366,992 mt of Palm Methyl Ester (PME) was exported from Malaysia from March to July versus 270,954 mt in the same period last year, data from the Malaysian Palm Oil Board, or MPOB, showed.
CPO front month futures on Bursa Malaysia hit a low of MYR1,873/mt ($445.37/mt) June 28, but rebounded sharply in August to hit the highest level so far this year at MR2,205/mt as on August 26, due to falling stockpile and rising exports.
Rising palm oil prices, coupled with falling gasoil prices, soon closed the doors on discretionary blending, with the PO-GO spread at zero to minus $50s levels in August.
A wider PO-GO spread means that biodiesel is cheaper than gasoil, making discretionary blending attractive.
CPO palm prices are expected to hover around MYR2,200-2,300/mt in September, Sathia Varqa, owner and co-founder of Singapore-based Palm Oil Analytics, said.
PALM INVENTORIES SHRINK
Indonesia and Malaysia have entered the later part of the year with falling inventories. Malaysian palm oil inventories fell below 3 million mt in March to touch 2.391 million mt in July, compared with 2.231 million mt a year earlier, MPOB data showed.
Meantime, Indonesian inventories increased for two successive months to 3.5 million mt in June, according to the country's GAPKI data, but was down versus 4.845 million mt in June 2018.
Lower Indonesian inventories have been driven by the climb up in domestic consumption and exports. Domestic consumption rose to 1.432 million mt in June, versus 1.126 million mt in June 2018, driven in part by the B20 blending mandate that kicked off in 2018, which was extended to non-Public Sector Obligation demand in September 2018, as well as rising exports.
From January-May 2019, Indonesian exports totaled 13.066 million mt against 10.938 million mt a year earlier.
Indonesian CPO sales to destination markets increased in 2019 because of the removal of the CPO levy of $50/mt. The US-China trade tensions also boosted demand for other palm products as the Chinese turned to palm oil to replace soybean oil.
"Indonesian palm oil production is expected to peak for the year in September to November, and Malaysia in September," Varqa said.
Therefore, September export demand is crucial for prices to stay supported above MYR2,200 levels. Any reduction in export demand will add downward pressure on prices as stocks are likely to soar toward the end of the year, Varqa added.
Malaysian exports have been increasing due to demand from China as well as India, particularly for the RBD palm olein product. Total exports of palm products jumped to 10,862 million mt for the first seven months of 2019, versus 9,430 million mt in the same period in 2018.
India lowered tax rate for RBD palm olein from Malaysia to 45% from 54%, giving Malaysian palm oil exports a boost at a time when the rest of ASEAN imports were taxed at 50%. However, this may change as India's Commerce Ministry is seeking higher taxes on Malaysian RBD palm olein imports.
INDONESIA BIODIESEL PRODUCERS TURN TO DOMESTIC DEMAND
The Indonesian domestic biodiesel mandate is expected to increase in 2020 to B30 blends. A higher PME blend into gasoil will increase the domestic demand for palm oil and further support CPO prices.
A rise in the mandate would allow Indonesian PME capacity to be used in the country throughout the year as it does not have winter months. Some producers had already reported preparing for the upcoming B30 blending mandate, and were expecting Indonesian PME exports to drop next year.
"We estimate that B30 would create additional demand of 3 million kiloliters per year," Richard Fung, Director, Investor Relations at Golden Agri-Resources, said.
The results of an EU anti-subsidy investigation into Indonesian PME imports to the bloc, due to be out Jan 4, 2020, could see the rest of Indonesian PME exports, after accounting for domestic consumption, diverted to China.
With a rapidly rising domestic mandate within Indonesia, the loss of European demand on PME may not have much of an impact on either CPO prices or PME production within Indonesia.
Malaysia would gain from Indonesia's loss, and some Malaysian producers had already reported receiving inquiries from European buyers for next year cargoes.
Read more at https://www.spglobal.com/platts/en/market-insights/videos/market-movers-asia/090219-us-china-crude-oil-soybeans-trade