This article first appeared in The Edge Financial Daily on June 19, 2018
Plantation sector
Maintain neutral: It was reported that European Union (EU) negotiators plan to withdraw its earlier demand for restrictions on the use of palm oil by 2020 with a softer regulation as a complete phaseout of biofuels only occurs by 2030, which give the palm oil exporters a longer period to identify new markets. The move, though still remaining unfavourable to major palm oil-producing countries like Indonesia and Malaysia, is considered a softer stance, giving more time for both countries to seek further negotiations with EU groups in the future.
Crude palm oil (CPO) futures fell to a 22-month low lately before recovering to RM2,336 per tonne. CPO prices could continuously come under pressure in the second half of the year (2H) due to stronger production while inventories are likely to rebound after declining for five straight months. We maintain our “neutral” outlook for the sector following our downward revision in CPO price outlook from RM2,500 per tonne to RM2,350 per tonne.
In January, the European Parliament caused a havoc among palm oil producers when it called for a ban on palm oil use in transportation effective 2021. However, the proposed restrictions draw opposition from many national governments and the European Commission as it would result in rapid inflation if more expensive alternative vegetable-based fuels like rapeseed oil are used.
The proposal poses a threat to most palm oil producers as about half of the palm oil exported to the EU region is being used to produce biodiesel. Based on 2017 palm oil data, Indonesia exported about five million tonnes of palm oil products to the EU while Malaysia exported 1.99 million tonnes. The EU accounted for 12% of Malaysia’s export volumes while 16.2% for Indonesia in 2017.
The European Parliament’s new proposal suggests that contribution from biofuels produced from unsustainable food or crops for transportation usage should not exceed its average from 2014 to 2018, with maximum of 7% of total transport consumption. In our view, this implies a cap of biodiesel blend at the B7 level. It short, the use of palm oil in biodiesel would be capped at the B7 level until 2023 and gradually reduce to zero by 2030. The proposal initiated by the EU negotiators would need approval by EU ministers and the European Parliament plenary.
CPO prices are likely capped below RM2,400 per tonne. After hitting 22-month low, CPO prices rebounded to RM2,336 per tonne and we think they could head toward RM2,350 per tonne with the recent strength in the US dollar, attributed to the interest rate hike outlook. Also, given the stronger CPO production outlook in 2H, boosted by the seasonal trend and favourable rainfall, the CPO price is unlikely to strengthen in the near term. — PublicInvest Research, June 18