This article first appeared in The Edge Financial Daily on March 8, 2018

KUALA LUMPUR: Two leading vegetable oils analysts, Thomas Mielke and James Fry, have a rather bearish outlook on palm oil this year. Mielke forecasts that average crude palm oil (CPO) price could fall to as low as RM2,350 per tonne in six months. Fry predicts a low of RM2,200 per tonne for palm oil futures.

Mielke, executive director of ISTA Mielke GmbH which publishes Oil World publication, said if the ringgit weakens, or if CPO production falls short of expectations, there is an upside potential for average CPO prices to reach RM2,700 per tonne.

However, Mielke does not see the likelihood of that happening. In fact, he said there would be no significant increase in CPO prices in six months.

Mielke sees Malaysia’s CPO output rising to 20.76 million tonnes in 2018, compared with 19.92 million tonnes in 2017. Indonesia’s would go up to 38.8 million tonnes from 36.8 million tonnes. Global CPO production should reach 70.84 million tonnes, from 67 million tonnes in 2017, he said.

LMC International Ltd chairman Fry said the benchmark CPO futures price is expected to rise briefly to the RM2,600 per tonne level as stocks fall, but would then drop to nearly RM2,300 by July before Malaysian export taxes are restored. He set the floor price at RM2,200 a tonne.

“At this point, the Bursa Malaysia Derivatives will stabilise — with export taxes set at zero — at below RM2,250. Rising stock will hit free on board (FOB) CPO fairly quickly after June, taking it below US$600, and below US$575 in the October to December quarter this year, unless Indonesia’s CPO fund acts to step up its mandate,” Fry said.

However, Malaysian export taxes for palm oil may be suspended until August, “if the national election (14th general election) is delayed until its final deadline”, he added.

Still, he said India’s import tariff hike for palm oil and refined palm oil meant that the Malaysian Palm Oil Board’s palm oil stock would not fall below 2.3 million tonnes this year, but would end 2018 higher than that in 2017.

He also expects Opec to keep brent crude trading at the US$65 to US$70 per barrel range this year. “Other things being equal, [for] every US$10 per barrel rise in crude oil prices increases CPO prices by US$70 to US$75 per tonne,” he said.

Milke and Fry were speaking at the Palm and Lauric Oils Price Outlook Conference 2018. In contrast, another leading sector analyst, Dorab Mistry, director of Godrej International Ltd, was more bullish during his presentation at the same conference on Tuesday.

Mistry said benchmark CPO futures are expected to rise to RM2,700 per tonne by June, from RM2,500 per tonne in March. He said it is not possible to have bearish commodities amid growth taking place in a coordinated manner worldwide, with elections held in several countries this year, including in Malaysia — the second-largest palm oil producer in the world.

2017-2018 a ‘temporary’ output recovery

Mielke said the strong recovery in CPO production globally in 2017 and 2018 will be temporary. “From 2019, there will be smaller annual increases in palm oil production and supplies,” he added, noting the shortage in CPO production may be seen as early as 2020.

In 2017, some 45.5 million tonnes or 70% of CPO are used for food, 11.5 million tonnes (17.8%) for energy, particularly biofuels, 5.7 million tonnes (8.8%) used in the chemical industry and 2.2 million tonnes (3.4%) in other sectors.

While China recently increased its imports of soy meal, Mielke still sees a growth in palm oil imports to 5.5 million tonnes in the current season. He expects this to occur in the second half of this year. “We see China as a continued good buyer or improved buyer of palm oil in six months,” he said.

Mielke also said European palm oil imports are now at a record high, and that they are likely to stay high over the next few months due to energy needs. “It’s the biofuel market which drives the palm oil imports, and the reality of palm oil in Europe is much different than what the sentiment is,” he added, referring to the EU Parliament’s vote last month to ban palm oil-based biofuels by 2021.

However, he said Europe is not the future growth area for the palm oil industry. Instead, growth is touted to be happening outside Europe, where more palm oil is seen needed annually in the next few years, he added.

Citing Asia, India and Pakistan, among others, as potential markets for growth, Mielke said “there is considerable growth in palm oil demand in line with rising population as well as the middle-class population [in those countries]”.

Notwithstanding the negative longer term outlook from Europe, he said global demand for palm oil will continue rising and an average annual increase of palm oil production of 2.8 million tonnes is needed over 10 years to meet the demand.