KUALA LUMPUR (Apr 29): Crude palm oil (CPO) prices are expected to remain soft due to concerns of lacklustre demand amid ample supply of rival vegetable oils and weak crude oil prices, RAM Rating Services Bhd said.

In a statement today, the rating agency said the current narrow premium of soy oil to CPO could reduce the appeal of CPO, dampening growth in demand for the commodity as consumers switch to competing oils.

RAM said in the first quarter of 2015 (1Q15), the margin between soy oil and CPO was US$90 per tonne (RM320.39) compared with US$88 per tonne (RM313.23) a year ago.

“The price of CPO came in at the lower end of our price forecast of RM2,200 per tonne to RM2,400 per tonne in 1Q15, averaging RM2,204 per tonne,” said RAM.

“A pick-up in CPO production, as yields recover after disruptions caused by floods and the effects of dry weather that had depressed CPO production in January and February 2015, may lead to a build up in Malaysia’s palm oil inventory to over 2 million tonnes in the near term, further pressuring prices,” it added.

As at end-March 2015, palm oil stocks in Malaysia stood at 1.87 million tonnes, up 10.5% year-on-year and 5.2% month-on-month.

However, the rating agency said it recognised that CPO prices could be uplifted by the successful implementation of Indonesia’s mandate to increase the biofuel content in diesel from 10% to 15%.

“The B15 mandate is estimated to boost CPO demand by 2 million tonnes in 2015,” it added.

“Although a higher biodiesel subsidy of Rp4,000 per litre and plans to impose levies on the republic’s palm oil exports to fund the B15 programme would be positive to its execution, we remain cautious of the pace of implementation, given that it is still in the preliminary stages and in view of concerns of engine incompatibility with high biodiesel content,” it noted.

RAM also said the Indonesian government’s execution of previously initiated mandates had been marred by pricing, infrastructure and logistical challenges.

The June contract for Brent crude oil is currently trading at US$65.54 per barrel (RM233.18).

Reuters reported that Malaysian palm oil futures fell to their lowest in nearly two weeks on Monday, as a modest increase in export demand was curtailed by the strengthening ringgit and concerns over rising inventory.

The benchmark July contract on Bursa Malaysia had closed down 2.1% to RM2,109 a tonne on Monday, just above the intraday low of RM2,107, the weakest since April 14.