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Siti Safura Masiron


The Borneo Post



Analysts neutral on palm oil sector, CPO prices uncertain

05.11.2019 (The Borneo Post) - KUCHING: Analysts retain their ‘neutral’ view on the palm oil sector and they are uncertain about the performance of crude palm oil (CPO) prices.

In a report, the research team at AmInvestment Bank Bhd (AmInvestment) commented: “We are unsure if the surge in CPO prices is sustainable due to the speed and magnitude of the increase. However, we are cognizant of the fact that CPO prices are usually higher in the fourth quarter (4Q) and 1Q of the calendar year as these are the low production months.”

It pointed out that in in roughly two weeks, spot MDEX CPO price has surged by 15.3 per cent with MDEX spot CPO price climbing to RM2,444 per tonne last Thursday from RM2,119 per tonne on Oct 14.

“The surge in CPO price came in spite of the news that India is mulling higher import taxes for refined palm oil and an advisory by the Solvent Extractors Association of India that its members shun imports of Malaysia’s palm products,” it highlighted.

It attribute the rise in CPO prices to several factors including strong exports in October, which may result in Malaysia’s palm inventory in October being lower than September’s 2.45 million tonnes.

 It noted that AmSpec said that Malaysia’s palm shipments rose by 17 per cent in the month of October compared with September while Intertek said that Malaysia’s palm shipments increased by 10.6 per cent month-on-month (m-o-m) in October while SGS said that the growth in exports was 14.6 per cent and SGS added that Malaysia’s palm shipments to China surged by 48.1 per cent m-o-m in October.

It also pointed out that the rise in prices of US soybean and soybean oil could have driven CPO prices higher.

It noted that US soybean oil price for December went up by 6.6 per cent to US$0.3075 per pound last Thursday from US$0.2884 per pound on 27 September as China may buy more US agricultural products pursuant to the US-China trade talks. The price discount between soybean oil and CPO is 13.5 per cent or US$91 per tonne currently vs. the averages of 24.5 per cent in 2018 and 16.2 per cent in the past five years.

“US soybean price has risen by 6.9 per cent to US$9.16 per bushel last Thursday from US$8.57 per bushel on 9 September on the back of optimism over the US-China trade talks and wet weather in the US Midwest, which may affect harvesting,” AmInvestment added.

Biodiesel policies in Indonesia and Malaysia could also have driven CPO prices higher, the research team said.

“Indonesia is expected to implement B30 in 2020F, which may result in biodiesel consumption rising to 9.6mil KL (8.4 million tonnes) in 2020F from 6.6 million KL (5.7 million tonnes) in 2019E. The consumption of 8.4 milllion tonnes are about 18.5 per cent of Oil World’s forecast of 45.4 million tonnes for Indonesia’s CPO production in 2020F.

“The only issue is infrastructure – whether there are enough vessels to ship both CPO and biodiesel in Indonesia and whether there would be too many biodiesel delivery points,” it explained.

Recall that in 2H2018, CPO prices slumped as there was a glut of CPO in Indonesia, especially in Kalimantan. Industry palm production surged in Indonesia but at the same time, there were not enough barges or vessels to ship CPO to the refineries.

“The barges or vessels were used to transport biodiesel instead as Indonesia accelerated the implementation of B20 in 2H2018. Malaysia is expected to implement B20 at the end of 2020F, according to Budget 2020. Hence, the impact may only be felt in 2021F. B20 is estimated to result in a consumption of 1.3 million tonnes in total, which are about 6.5 per cent of Malaysia’s CPO production of 20 million tonnes in 2020F,” AmInvestment said.

In terms of discretionary demand for biodiesel however, it pointed out that this might weaken as CPO is now more expensive than gasoil. Based on current prices, CPO price is US$18 per tonne higher than gas-oil price.