This article first appeared in The Edge Financial Daily on December 17, 2018

KUALA LUMPUR: This has not been a very good year for Malaysian planters. Not only did weaker demand drive the domestic palm oil stockpile to hit record highs and prices to multi-year lows, there were also the external noises to deal with, such as the anti-palm oil campaigns in the West.

With production of the edible oil easing this month due to the monsoon season and a pickup in demand given the widening price disparity between palm oil and soybean oil, a reprieve for the embattled palm oil producers could be on the cards going into the first quarter of next year, analysts said, but it could be short-lived.

“Traditionally, the first quarter of the year will see production slowing down while export demand is likely to increase on the back of the Lunar New Year festivities. Stockpiles in China and India of edible oils are also low at the moment so they may have to stock up,” Sam Yen, a senior analyst of Singapore-based independent online palm oil news provider Palm Oil Analytics, told The Edge Financial Daily.

“And given the current low price of crude palm oil (CPO), which has resulted in the spread between palm oil and soybean to be favourable to the former, we might see a pickup in demand maybe towards the end of December and in January. As such, things should be better in the first quarter of 2019,” he said.

The government’s push for greater biodiesel consumption will also help to boost CPO prices, albeit on a “one-off positive effect” until another mandate is introduced, added Yen.

Additionally, India’s palm oil imports are expected to pick up in January in anticipation of an import duty reduction to 40% on CPO and 45% on refined palm oil (RPO), from 44% on CPO and 54% on RPO, by the end of this month.

AmInvestment Bank plantation analyst Gan Huey Ling noted that the price differential between the two commodities had consistently exceeded 20% since July this year, which she deemed as rare.

She said the large price disparity, which has surpassed the six-year average of 15.3%, could be attributed to the fall in CPO price resulting from the supply glut in Kalimantan, Indonesia, and the depreciation of the ringgit against the US dollar.

“Generally, a wider gap in the price discount between palm oil and its main competitor soybean oil helps with the uptake of palm oil as palm oil then becomes more affordable for buyers looking to stock up on edible oils,” Gan added. A check on plantation companies listed on Bursa Malaysia revealed that most had recorded a decline in their net profit for the first nine months of 2018.

In fact, all nine plantation companies under Hong Leong Investment Bank’s coverage, which reported their quarterly results in November, missed both the research house’s and consensus expectations, and the lower earnings were mainly attributed to the weaker-than-expected palm product prices.

The negative sentiments surrounding deforestation issues caused by palm oil production in the European Union did not help matters this year, making investments in sustainability measures seem futile as Primary Industries Minister Teresa Kok put it.

Going forward, analysts are of the view that the sector still lacks strong catalysts to support the continued upward momentum of prices throughout the year.

In a Dec 11 note to clients, TA Securities Research analyst Angeline Chin said she believes that the recovery in CPO prices could even be delayed due to the successive build-up of inventories and the weaker-than-expected formation of the El-Nino weather pattern next year.

Latest data released by the Malaysian Palm Oil Board showed that Malaysian palm oil stocks rose 10.5% to three million tonnes in November — the highest in at least 18 years — due to steeper seasonal declines in exports that outpaced the decline in production.

Including Indonesia’s stocks of more than 4.4 million tonnes in October, the world’s two largest palm oil producers have a combined stockpile of nearly eight million tonnes.

A stubbornly high palm oil stockpile does not bode well for CPO prices. But to make things worse is the supply glut in top producer Indonesia, which resulted from the ongoing logistics issues from the government’s push in the B20 biodiesel mandate.

Instead of supporting CPO prices, the B20 biodiesel policy in Indonesia has done the opposite and exacerbated the glut in palm oil in Kalimantan, AmInvestment Bank’s Gan pointed out.

“If companies do not increase the number of barges or vessels and at the same time Indonesia implements the B25 or B30 biodiesel policy, the glut in palm oil may worsen. This is unless industry production of CPO drops drastically,” she added.

Kenanga Research plantation analyst Lavis Chong concurred, noting that the logistics issue in Indonesia must be monitored as the planters’ oil tanks are filled to the brim at the moment and waiting to be offloaded once the logistics are sorted out. “This might cap any upside to CPO prices,” he said.

Chong also highlighted the likely occurrence of the dry El Nino event next year, although it is unlikely to bring major damages. “Unless it plays out to be severe, it (the impact of El Nino) will not be a huge catalyst for the sector,” he added.

Bumpy ride ahead with CPO trading below RM2,500

Industry players like United Plantations Bhd are preparing to face another year of struggle as analysts project CPO to trade below RM2,500 per tonne.

“For the majority of palm producers in 2019, it will be an uphill battle if prices remain at the threshold of RM1,800 to RM2,000 per tonne,” its chief executive director Datuk Carl Bek-Nielsen told The Edge Financial Daily.

“And at the present exchange rate, I believe that prices for the first quarter will hover around RM1,800 to RM2,050. It is going to be a bumpy ride [and] we’ll be fastening our seat belts,” he said.

On its part, United Plantations will be focusing on driving yields up, reducing field losses, and producing premium-quality palm products to help during a time of low commodity prices.

AmInvestment’s Gan has downgraded the plantation sector to “underweight” and revised full-year CPO price forecast downwards to RM2,300 per tonne, from RM2,500 per tonne previously.

“Year to date, CPO prices [have] averaged at RM2,254 per tonne and will close the year at the RM2,230 per tonne level as current spot prices are trading steeply lower, at RM1,735 per tonne. Our 2019 CPO price assumption averages at RM2,200 per tonne,” Public Investment Bank Bhd analyst Chong Hoe Leong wrote in a Dec 11 note.

Affin Hwang Capital Research shares a slightly optimistic view as it sees CPO prices hovering between RM2,400 and RM2,500 per tonne for 2019 to 2020, while TA Securities has maintained an average CPO price forecast of RM2,400 per tonne for next year.

Last Friday, the benchmark palm oil third-month contract closed RM9 higher at RM2,199 per tonne.