7 Mar 2019 (The Edge Markets MY) KUALA LUMPUR: Palm oil experts are moderately bullish on the recovery of crude palm oil (CPO) prices this year, with limited upside seen. The industry is expected to shape up better next year instead, on the back of a slowdown in production and high palm oil stockpiles easing on higher biodiesel mandates.
Speaking at the Palm & Lauric Oils Price Outlook Conference & Exhibition 2019 here yesterday, leading industry analyst Thomas Mielke said based on fundamentals, Bursa Malaysia derivatives are undervalued and should recover in the next four to six months to between RM2,350 and RM2,450 a tonne.
However, the recovery will only be moderate, he said, as the upside will be limited by high inventory, which continues to plague the sector despite higher global demand for palm oil seen.
“The prices of palm oil should remain relatively low despite the strong demand, as long as stocks are ample. And the stocks are still ample. So we shouldn’t be too bullish, too early. It is getting more bullish in 2020, but this year, only moderately higher,” Mielke, who is the editor of Germany-based publication Oil World, stressed.
He added that while growth in world production is seen to slow to 2.8 million tonnes in 2019 — from a 4.2 million-tonne growth — paving the way for a global production deficit, current high stocks of palm oil will moderate the supply tightness.
His view takes into account total output in the eight largest CPO producers in Southeast Asia and Latin America.
This brings his forecast for global palm oil output to 75.26 million tonnes this year, from 72.48 million tonnes in 2018.
Malaysian production is expected to rise 0.6 million tonnes to about 20.1 million tonnes this year, after dropping 0.4 million tonnes in 2018. However, the largest palm oil producing country, Indonesia, should see a slowdown in production growth to 1.5 million-two million tonnes, from 4.2 million tonnes last year, he said.
Besides palm oil output, Mielke said other swing factors to watch out for include the US-China trade war, energy demand, crude oil prices, and import purchases.
Agribusiness consultancy firm LMC International Ltd chairman Dr James Fry is also expecting CPO prices to rise in 2019, on expectations that global palm oil inventory will fall by up to 1.5 million tonnes, and as Brent crude oil trades at US$70 (RM286.48) per barrel.
Fry said CPO’s free on board Southeast Asia price is seen at US$620 a tonne.
“Since we start with very high stock levels, we do not expect the premium to regain its long run average, but do expect lower stocks to lift it by US$100 to US$170 by mid-year.
“I believe that the stand-off between US (crude oil) producers and the Organisation of the Petroleum Exporting Countries will leave crude oil trading in a range near US$60 per barrel for West Texas Intermediate and US$70 per barrel for Brent,” Fry said at the event yesterday.
As long as Malaysia and Indonesia stick to their respective B20 and B10 biodiesel mandates, world palm oil stocks should fall by one million to 1.5 million tonnes in 2019 amid the usual seasonal stock drawdown until June this year, Fry said.
Brent to gradually weaken
Fry said palm oil prices are linked to the crude oil market due to the growing use of the commodity in making renewable fuels. Expansion in biodiesel production is also helping to draw down inventories and support prices, he said.
Co-founder and executive chairman of Indonesian palm oil producer Triputra Agro Persada (TAP) Group Arif P Rachmat, on the other hand, is more optimistic.
He sees the “worst is over”, following the recent plunge in CPO price to a historical 12-year low in November last year.
“I believe that if we could get through 2019 with better prices, which is my conviction, then we will sail in much safer and calmer waters for the next three to five years. I am optimistic about prices in five years from now,” said Arif, adding his optimism is on the back of easing production as a result of insufficient new planting.
For this year, he said CPO price should average US$550 to US$600 per tonne, with no major falls expected.
Agriculture specialist and policy commentator independent expert G Chandrashekhar, meanwhile, is of the opinion that while there is upside potential for CPO prices for the next three months, it is still rather limited.
Chandrashekhar said CPO prices for the three months ending June this year should average RM2,300 per tonne due to seasonal factors, but could moderate to RM2,250 per tonne in the second half of 2019.
“This is primarily because of additional supply that would come in when the market stays in a state of balance, and as (Brent) crude oil prices decline.”
“I am expecting Brent to gradually weaken to US$60 and possibly to US$55 per barrel towards the end of the year, simply because of huge supply pressures and possibly demand compression in the second half of the year due to global growth concerns,” he said.
At yesterday’s close, the benchmark palm oil contract for May delivery was trading RM4 lower at RM2,157 a tonne.
Should planters watch out for El Nino?
A mild El Nino weather pattern has started forming in Indonesia, with planters observing drier conditions in their oil palm estates starting last month, especially in the Kalimantan district, according to TAP’s Arif.
Arif said the drier climate observed now typically restricts production and could potentially boost CPO prices this year, to average at US$550 to US$600 a tonne.
“According to an El-Nino chart superimposed between 1997 and 2015, which were the two hottest years in record in history, you can see the weather pattern is going to be drier [this year].
“Actually, in my own plantation, starting mid-February in some parts of south Kalimantan, I have started seeing drier season, so we (planters) have to be prepared. And what does this spell for prices? Obviously, prices will go up,” he said.
However, Mielke said while the possible formation of an El Nino phenomenon is a risk factor, it is not an immediate one.
“I think it is too early to get crazy about a possible El Nino happening. It is a risk factor that we have to look at, but indications show that it is not high enough to bill this in your forecast,” Mielke said.
Fry, meanwhile, said the formation of El Nino is weak, based on the Oceanic Nino Index (ONI), which is the usual indicator of the dry El Nino weather and wet La Nina weather in Southeast Asia.
“This weather cycle has returned more quickly to the El Nino range than the past two El Ninos. However, the ONI has turned and fallen slowly since November. So, technically, we’ve had a weak El Nino, and it doesn’t look like there’s anything more than that,” he said.