Thursday 30 May 2024
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This article first appeared in The Edge Malaysia Weekly on September 12, 2022 - September 18, 2022

THE Malaysian palm oil inventory, which is likely to have surpassed two million tonnes for the first time in two years, is expected to add further downward pressure on crude palm oil (CPO) prices that have fallen from their peak in April this year.

As production picks up in the second half and stiffer competition from rival Indonesia curbs export demand, palm oil inventories in Malaysia are expected to climb at least 15.8% in August from a month earlier to 2.05 million tonnes, according to the median of 10 estimates in a Bloomberg survey of analysts, traders and plantation executives.

“Expanding stockpiles could further dampen palm oil prices, which have tumbled more than 40% since May, as the world’s top producer Indonesia implemented various policies to boost its own shipments, including an export levy waiver that has since been extended to end-October,” says analyst Avtar Sandu of Singapore-based Phillip Nova Pte Ltd, which is part of the PhillipCapital Group.

The CPO third-month contract has fallen 42% from RM6,326 in late April to RM3,633 at midday last Friday, owing to the impact from a reversal of Indonesia’s export ban on palm oil as well as global recession fears casting a pall over commodity prices.

The Malaysian Palm Oil Board’s (MPOB) August production data, which will be released on Monday (Sept 12), will be eyed as Malaysia’s palm oil production is seen rising 10% from the previous month, with most gains coming from Sabah, followed by productions in Peninsular Malaysia.

In July, Malaysia’s palm oil inventory rose to an eight-month high of 1.77 million tonnes as palm oil imports jumped.

David Ng, senior proprietary trader at derivatives trading firm Iceberg X Sdn Bhd, forecasts CPO prices to settle at RM3,500 this year.

MPOB earlier forecast CPO prices to average at RM5,300 in the second half of 2022, owing to expectations of higher global vegetable oil supply, higher CPO production, especially in the third quarter, as well as lower palm oil exports.

“The market for the past two years has been trading below the two-million level. Over the past couple of months, the stock levels have been higher. If the MPOB announcement confirms the inventory level approaching above the two-million mark, prices would be adjusted accordingly. We are looking at prices to be around RM3,500 per tonne,” Ng tells The Edge.

He adds that Malaysia, as the world’s second-largest palm oil producer, would very likely cut export tax on palm oil to remain competitive against Indonesia amid waning demand from China as lockdowns induced demand destruction.

“In terms of competitiveness, Malaysia is losing out to the Indonesians. Indonesia has reduced the export tax levy, which shows they are really focused on clearing their stocks because they built up excess inventories in the past couple of months. Clearly, they have reduced those.

“As a result, Malaysian exporters are at a losing end. First of all, [Indonesia’s] pricing base is lower than what Malaysia is offering,” he says.

In fact, Indonesia has extended the waiver on palm oil levy by two months until Oct 31, 2022, to boost the shipment of palm oil.

“Malaysia might slash the export levy. MPOB has a reference price for CPO. If the reference price of CPO keeps coming down, naturally, the taxable export duty for Malaysian palm oil will come down as well. Based on the reference price over the past couple of weeks, it is quite clear that we should see a reduction in tax,” says Ng.

The Malaysian palm oil export tax structure starts at 3% for CPO in the RM2,250-to-RM2,400 range. The maximum rate is set at 8% for prices exceeding RM3,450.

Ng adds that CPO continues to trade at a significant discount to soybean oil at US$593 per tonne, ­although he foresees that this could narrow to US$300.

“If you look at vegetable oil, palm oil seems to be the most attractive in terms of price. If you look at palm oil to bean oil, the premium is about US$600 and it can’t go far beyond that. The premium will be reduced to US$300.

“Eventually, we should see palm oil playing a bigger role in vegoils because it’s still very abundant and cheaper compared with other vegetable oils,” he says.

Meanwhile, CGS-CIMB in a Sept 5 report says CPO prices will be supported at current levels despite rising stock due to the sharp discount between Malaysia’s refined, bleached and deodorised (RBD) palm olein and Argentine soya oil, with the gap widening to US$358 per tonne as at Sept 1 versus an average US$90 per tonne in the five years until 2021.

“This would result in demand shifting towards palm oil in many importing countries to pare down stock, in our view,” say its analysts Ivy Ng and Nagulan Ravi.

They add that labour shortage in Malaysia is expected to improve only by year-end, which could limit the recovery in palm oil output in the coming months.

It is worth noting that the Malaysian Palm Oil Association in a statement on Sept 7 warned that the slow return of workers to the plantation sector could see the country’s CPO production declining for three years in a row. It has estimated CPO production of 18 million tonnes this year while the MPOB has forecast 18.5 million tonnes.

CGS-CIMB expects the CPO price to trade between RM4,000 and RM4,500 per tonne in September and it has Kuala Lumpur Kepong Bhd, Hap Seng Plantation Bhd, First Resources Ltd and Wilmar International Ltd as its stock picks for exposure to the sector.

Brent crude, pent-up demand and biodiesel mandate lend support

Ng also sees higher crude oil prices supporting CPO prices. “Crude oil is still trading at the US$80-to-US$90 levels. If crude oil prices start to come down, it will put more pressure on palm oil,” he says.

Brent crude is trading at US$89.49 per barrel at press time.

Meanwhile, RHB Research says pent-up demand in price-sensitive countries such as China, India, Pakistan and Bangladesh could keep CPO prices elevated, given the extremely low stock levels currently.

“As at end-July, China’s palm oil stock levels were 57% below historical levels, while India’s and Bangladesh’s palm oil stock levels were 92% and 50% below respectively,” writes RHB Research analyst Hoe Lee Leng last month, adding that these lower inventory levels would continue to support CPO prices.

“We continue to expect stock levels to remain tight for the next two to three months, possibly until the end of the third quarter, thereby providing support to CPO prices.

“We expect CPO prices to range between RM3,800 and RM4,500 per tonne for the remainder of the year. As such, we tweak our CPO price assumptions down slightly for 2022 to RM5,100 per tonne (from RM5,300 per tonne).”

Prices will also be further supported by the Indonesian government raising its biodiesel mandate to ease high inventory levels in the country.

“This has helped domestic CPO prices somewhat, with prices now at RM2,800 per tonne (up 20% from three weeks ago), albeit still relatively lower than the current effective price net of export tax of around RM3,800 per tonne,” notes Hoe, whose top picks are KLK, IOI Corp Bhd and Wilmar.

In 2021, global biodiesel output stood around 40 million tonnes, with palm oil’s market share at 30% to 35%, or 14 million tonnes.


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