‘CPO prices to stay above RM3,000 in 1H20 despite export disruption’

This article first appeared in The Edge Financial Daily, on January 20, 2020.
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KUALA LUMPUR: Crude palm oil (CPO) prices showed signs of weakness last week, retreating from a three-year peak of around RM3,100, but analysts believe this could just be temporary.

They expect a rebound to RM3,300 a tonne, at least in the first half of 2020 (1H20), against a slowdown in output and stronger demand from biodiesel mandates.

Such a bullish expectation has factored in noises surrounding India’s curbs and the recently signed US-China phase-one trade deal, said to result in a demand recovery for soyoil for crushing activities in China, which is committed to buying more US goods including soybeans as trade tensions eased.

On Jan 10, the benchmark third-month palm oil futures contract hit its three-year high of RM3,134 a tonne, recovering over 60% from its low of RM1,937 in July 2019. Last Friday, the commodity closed RM43 down at RM2,843 per tonne.

RHB Research Institute vice-president of equity research Hoe Lee Leng is expecting the palm oil industry to continue benefitting from higher CPO prices in 2020, with 1H being stronger than 2H, as is usually seasonally the case.

“We believe prices would range between RM2,700 and RM3,200 per tonne in 1H before moderating seasonally to RM2,400 to RM2,700 per tonne in 2H,” Hoe said, adding that the most significant catalyst for palm oil demand remains in the biodiesel mandate.

“Although the price gap between CPO and gas oil is now in a negative territory of US$27 a barrel, we believe Indonesia’s mandate remains achievable due to money available in the biodiesel fund and the resumption of collecting US$50 per tonne in levies from January this year.”

Hoe added that a tight CPO supply, coupled with lower-than-historical stock or usage ratios for vegetable oils, will ensure CPO prices remain high for most of 2020.

Malaysia’s total palm oil stocks dropped 11% to 2.01 million tonnes in December 2019 from 2.26 million tonnes in the previous month, Malaysian Palm Oil Board (MPOB) data showed.

Hoe foresees CPO demand from China and India will remain stable this year. She attributed a strong demand from China as demand for soybeans has been curbed by a severe African swine flu causing low swine inventories and high soybean stock levels. In China, soybeans are primarily used to feed its massive livestock sector.

For India, she expects a growing consumption per capita and population to support demand for CPO, coupled with the restriction on refined oil imports.

She cited an Oil World report anticipating China’s demand for CPO to grow 12% on year in 2020, after rising 21% in 2019. Demand from India is projected to increase 2.5% year-on-year (y-o-y), after rising 10.7% in 2019.

Similarly, Agribusiness consultancy firm LMC International Ltd chairman Dr James Fry concurred that CPO prices would stay between RM3,000 and RM3,300 for the next few months given a tight CPO supply, before moderating to RM2,750 to RM2,800 in 2H, assuming crude oil prices staying at the current level.

“The palm oil market has been experiencing a perfect storm in the past three months. Production has been harmed by a delayed cumulative impact on yields of the cutbacks in fertiliser use, droughts and haze, and these have combined with the first significant signs of a slowdown in the areas coming into full maturity.

“At the same time, evidence of the Indonesian government’s strong commitment to implement its B30 mandate has led people to increase their estimates of palm oil demand for 2020. The results have been expectations of a faster-than-usual seasonal decline in palm oil stocks for early 2020, and this had fed into CPO prices and will have a major influence on the price outlook for 2020,” he explained.


India’s curb could be a ‘blessing in disguise’

There are fears of exports to India dropping after the Indian government announced last Friday to restrict imports of refined palm oil.

Further, Reuters reported that the Indian authorities informally instructed traders to avoid purchases from Malaysia following a row concerning Prime Minister Tun Dr Mahathir Mohamad’s criticisms of the country’s policy towards Kashmir.

Regardless, for Hoe, India restricting Malaysian refined palm oil imports means the former, for now, must rely on Indonesian CPO, with its own issues to take care of.

Not only is Indonesian CPO now at a premium to Malaysia’s, Indonesian exports are also limited by high domestic usage, while supply remains tight.

“Indonesia’s CPO exports are limited by its mandate [for biodiesel] to be placed, hence its domestic usage is high. Its production for the first ten months of 2019 (10M19) was up 11%, but exports were only up 2%. Exports to India were down 31% for the same period.

“For now, the production is seasonally low and [there is a] tight supply in the market. India’s CPO stock level is down 20% y-o-y currently; it cannot just rely on Indonesia.

“How long can India hold onto this policy? At the end of the day, if Indonesia diverts more CPO to India, Malaysia will then sell to the countries that Indonesia was previously selling to — a zero-sum game,” she explained.

Fry sees this development as a “blessing in disguise” for the Malaysian palm oil industry, as Malaysia could replace Indonesia in the higher-value refined palm oil markets where the latter had supplied to.

This is as Indonesia having to cut back significantly on its exports of refined and other processed oil products, especially as more of its own palm oil production is due to be consumed locally to supply the biodiesel mandate, leaving less for exports.

“Indonesia is going to have to supply an awful lot of CPO, take it away from its refining sector, and that’s going to leave Malaysia, not shipping CPO to India, to convert CPO into refined oil.

“So, at least in your (Malaysian) industry as a whole, the value of exports in the downstream is kind of a blessing in disguise. This is a logical consequence that I believe in the Indian policy,” he explained.

Meanwhile, Palm Oil Analytics owner and co-founder Dr Sathia Varqa believes the current developments in India’s palm oil industry could be closely related to the Indian government’s budget presentation on Feb 1.

“It is normal to have these lobbying, announcements, banning and changes in tariffs ahead of the budget presentation. I think they may change their minds [later].

“Also, India is currently very low on edible oil stocks, at its four-year low. The monsoon arrived late, so it is low on soybean production by three million tonnes. India will have to buy not just from Indonesia, but also Malaysia,” he added.


US-China trade deal

Last Wednesday, an 86-page agreement was signed between the US and China, pausing the trade war that weighed on US soybean producers especially hard for nearly two years. While details are scarce, among the products China has reportedly promised to buy more of include soybeans, besides wheat, cotton and pork.

Coupled with lesser slaughtering of hogs as the spread of African swine flu slows, soyoil could return to the edible oil supply in China, effectively reducing exports of RBD palm olein (refined, bleached and deodorised forms of palm oil) from Malaysia in future.

While these could eventually lead to a resumption of soybean flowing from the US to China, sales are unlikely to reach similar levels shipped before soybean tariffs of 30% were put in place since July 2018, according to Varqa.

“I think the US will struggle to regain all that market share because in the phase-one trade deal signed, details are unclear on the volume commitment,” he told The Edge Financial Daily. China bought 13.85 million tonnes of soybeans from the US between January and November 2019, down 16.4% from the same period in 2018.

While China has reduced reliance on US soybeans by switching about 80% of its purchases away from there, there are expectations that with the phase-one trade deal China will switch back some purchases to US soybeans, leading to higher crushing activities and more soyoil supplies.

However, Hoe pointed out that despite the positive price gap between CPO and soyoil at about US$12 per tonne, the situation is likely to correct itself when price-sensitive countries switch back to soyoil.

“We expect soybean prices to stage a slight recovery from low stock levels. In production numbers, soybean crops are set to decline 5.5% in 2020 after four bumper crop years, due to weather issues and less incentives to plant due to uncertainties concerning the trade war resolution.

“As a result, global stock usage levels for soybean are projected to fall to 28.3% in 2020, from 31.5% in 2019,” she explained.