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This article first appeared in The Edge Financial Daily on September 13, 2018

KUALA LUMPUR: August’s palm oil stock of 2.49 million tonnes — up 28.17% year-on-year and 12.4% from July — is the highest seen so far this year, and is pressuring the already depressed crude palm oil (CPO) prices.

But analysts see a silver lining amid the dark clouds. They say a combination of factors — higher Brent crude oil, weak ringgit, upcoming Deepavali festival and China’s appetite to raise inventory — is expected to offset the increased stock as the CPO prices continue to trade low in the final quarter of 2018.

The situation is supported by growing exports when Malaysia cut the palm oil export duty to zero in September from 4.5% in August after the average CPO price fell below the RM2,250 threshold.

According to the Malaysian Palm Oil Board (MPOB), daily CPO traded at RM2,210 per tonne last Friday.

MIDF Amanah Investment Bhd senior research analyst Alan Lim told The Edge Financial Daily that for the first 10 days in September, exports surged 63% compared with the corresponding period in August.

“It (high output) is usually bad [news] but not now because the strong Brent crude price will limit the downside risk. The favourable crude oil price would raise the biodiesel demand,” he said.

“We see a delayed purchase of CPO after the zero duty kicked in. So it is not all bad. Besides, the increase in output in August was not surprising as palm oil output is seasonally higher from August through November,” he added.

MPOB data showed that from January to August, average palm oil output grew to 2.32 million tonnes versus 1.62 million tonnes a year ago.

The CPO production in August totalled 1.62 million tonnes, down 10.4% on the year but up 7.9% from July.

Public Invest Bank Bhd analyst Chong Hoe Leong acknowledged the pressure on the CPO prices but said the lower prices coupled with the weak ringgit could encourage exports.

“We are already seeing strong numbers in shipment. The weak CPO prices will bump up exports. Apart from that, the weak ringgit, upcoming Deepavali festival in India, and the likelihood of China restocking will offset the high output,” Chong added in a telephone conversation.

He expects the CPO prices to trade between RM2,200 and RM2,300 in the fourth quarter.

For palm oil industry veteran MR Chandran, the August number is not positive for the CPO prices in the short term.

This is compounded by the fall in imports by India by 11.94% to 1.46 million tonnes between January and August since it raised its palm oil import duty early this year.

However, Chandran told The Edge Financial Daily that going forward, the full-year palm oil output may fall 600,000 tonnes below the national 20.3 million tonnes to 20.4 million tonnes target.

“That means that by the first quarter of 2019, the stock would be sufficient to meet demand. That might move the price back to RM2,400 per tonne,” he said.

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