Palm oil purchases by China, Pakistan fail to mitigate lower Indian demand

This article first appeared in The Edge Financial Daily, on December 12, 2019.
Palm oil purchases by China, Pakistan fail to mitigate lower Indian demand
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KUALA LUMPUR: Stronger demand from China and Pakistan for Malaysian palm oil last month failed to fully offset the decline in demand from India and other markets such as the US, an analyst said.

CGS-CIMB Research’s regional head of plantations research Ivy Ng said palm oil exports fell 15% month-on-month (m-o-m) in November, while growing 2% on a year-on-year (y-o-y) basis.

Indian demand fell 35% to 143,000 tonnes m-o-m from 220,000 tonnes, while demand from the US fell 44% to 16,000 tonnes from 28,000 tonnes in October, according to figures released by the Malaysian Palm Oil Board on Tuesday.

Conversely, China’s demand increased 24% m-o-m to 340,000 tonnes from 275,000 tonnes, while Pakistan’s demand rose 12% to 91,000 tonnes from 82,000 tonnes in October.

The stronger demand from China and Pakistan only partially offset the decrease in demand from India and the US.

“The weaker demand from India could partially be due to a sudden sharp rise in the CPO (crude palm oil) price. We expect palm oil exports to remain supported due to the resumption of export tax in January 2020,” Ng noted.

According to a plantation sector note from MIDF Research yesterday, as of November, India occupied 25.9% of the export market for Malaysian palm oil.

In her note, Ng said India’s monthly imports of edible oils revealed that palm oil’s share of India’s total edible oil imports was lower, constituting a 58% share of the country’s imports in October, compared with the 64% share seen in October 2018.

On an m-o-m basis from September to October this year, there was a 12% decline in Indian imports of palm oil to 778,000 tonnes from 880,000 tonnes. Furthermore, Indian edible oil stocks at ports and pipelines had fallen by 1% or 25,000 tonnes m-o-m to 1.78 million tonnes as of Nov 1.

However, on a y-o-y basis, there was a 3% gain in Indian imports of palm oil to 778,000 tonnes, from 754,000 tonnes last year.

When contacted by The Edge Financial Daily about whether this monthly decline is set to continue, Ng said that India is a price-sensitive market and, as the price of palm oil rises, the country would have to make a cost analysis of palm oil relative to other vegetable oils.

Ng however stressed that India will not stop buying palm oil.

“They will not stop buying palm oil. Right now they do not produce enough to not buy Malaysian palm oil,” she viewed.

She further explained that a rise in palm oil prices would also have an inflationary impact on Indian basic goods, and thus the poorer income groups might be priced out of such products.

MIDF’s Martin Foo said India would continue to be a top export destination Malaysian palm oil.

This is as a trade agreement signed between the two countries will reduce the tariff rate for Malaysian refined palm oil to 37.5% in 2020.

“Coupled with logistics proximity as compared with Indonesia, we do not expect any let-up in demand from India. In addition, lower crushing rapeseed, soybeans and peanuts in India would also lend support to demand for CPO,” Foo noted.

Foo also mentioned that India-based Hakan Agro DMCC had agreed to bring in more than a million tonnes of CPO next year.

For Ng, the CPO price may have run ahead of its fundamentals, oversupply crunch fears due to slower output growth and rising biodiesel mandates — evidenced by the current low soy oil premium against CPO for US$4 (RM16.64) a tonne versus the historical average of US$106 per tonne.

As such, Ng opined that the CPO price “could take a breather” and trade in the region of RM2,600 to RM2,900 per tonne this month.

CGS-CIMB’s picks within Malaysia are Genting Plantations Bhd, Hap Seng Plantations Holdings Bhd and Kuala Lumpur Kepong Bhd (KLK), while maintaining its “neutral” call on the agribusiness sector.

For Foo, the CPO price will remain elevated in 2020. He noted that while the current price provides a breather and will help to possibly uplift plantation companies’ earnings, the surge in the price could serve to dampen demand, which is predicated on the diminishing pricing advantage of CPO compared with soybean oil and Brent crude oil.

MIDF, meanwhile, has upgraded the sector from “negative” to “neutral”, with its top picks being Genting Plantations, KLK and Sime Darby Plantation Bhd.

The average CPO price rose 19% m-o-m and 36% y-o-y to RM2,493 per tonne in November, making it the highest monthly average CPO price in 2019.

Meanwhile, the average palm kernel price rose 26% m-o-m to RM1,427 per tonne last month. However, it traded at a RM1,067 per tonne discount to CPO, equivalent to 57% of CPO’s value.