10.04.2019 (The Star Online) - PETALING JAYA: The prospect of palm oil purchases to be included as part of the East Coast Rail Link (ECRL) renegotiation deal between Malaysia and China will be a boon for the local commodity’s outlook this year, say analysts.
CGSCIMB described this development as “potentially positive” for the plantation sector as well as Malaysia’s trade and current account surplus.
Palm oil makes up around 5.05 million tonnes or 58% of China’s edible oil imports.
Of the total, Malaysia’s palm oil imports is around 1.92 million tonnes or 5% of China’s total edible oil consumption.
“If palm oil is part of the ECRL deal, the impact on crude palm oil (CPO) prices will depend on the volume committed by China.
“Should the deal involve higher palm oil sales volumes from Malaysia to China compared with 1.87 million tonnes in 2018, this will boost CPO prices via the drawdown of stocks,” the research unit said in its latest report.
Another point is whether the commitment will involve China using more palm oil at the expense of other edible oils.
“This scenario will be also be an overall positive for CPO prices due to higher global demand for palm oil.
“However, if the deal results in China maintaining its palm oil usage, but, increasing its share of palm oil purchases from Malaysia, it could potentially help widen the CPO price premium gap between local and Indonesia’s CPO prices,” added CGSCIMB.
In the event that the ECRL talks lead to higher CPO price, it pointed out that it will be positive for upstream planters and Malaysia’s current account surplus.
The higher CPO prices would help boost the plantation companies’ earnings and/or defray the costs from higher minimum wage.
Malaysia recorded a RM38.9bil in palm oil trade surplus in 2018, or 2.7% of gross domestic product (GDP). Hence, CGSCIMB said higher export volumes as a result of incremental demand from increased purchases by China could boost Malaysia’s trade and current account surplus.
“We estimate that every 5% increase in palm oil export volumes, assuming palm oil prices remain constant, could raise the current account surplus by RM2bil or 0.14% of GDP.”
On March 4, Primary Industries Minister Teresa Kok witnessed the signing of four intent documents for the export of 1.62 million tonnes of palm oil from Malaysia to China with a combined value worth US$891mil.
The documents were signed between three Chinese companies and four Malaysian companies. It is worth noting that Malaysia’s palm oil has been losing market share in China.
The Malaysian Palm Oil Board statistics revealed that Malaysia’s share of total palm oil imports by China has declined from 76% in 2003 to only 38% in 2017. This could be due to stiff competition from Indonesian palm oil producers.
China is the third largest importer of Malaysia’s palm oil after India and the European Union.
However, China’s share of Malaysia’s total palm oil exports has declined from 28% in 2007 to 11.6% in 2017.
Read more at https://www.thestar.com.my/business/business-news/2019/04/10/ecrl-lift-for-cpo/#TEApBEdyBqQ1Sakx.99