Published on 06 Aug 2018.
CPO prices averaged RM2,421 per MT in 1H 2018, coming in at the lower end of RAM Ratings’ forecasted band of RM2,400-RM2,600 per MT. We are expecting full-year prices to be at the lower end of our CPO price projection of RM2,300/MT-RM2,500/MT. Prices have dipped to about RM2,100/MT of late amid soft demand, the pick-up in CPO output and concerns over the trade war between the US and China. That said, we are expecting prices to be sustained between RM2,200/MT and RM2,400/MT in the 2H on the back of demand support from biodiesel and the possibility that domestic production growth may not be as strong as anticipated. The increase in Indian import duties on rival soybean oil (SBO) in June 2018 is also expected to reverse the downtrend in palm oil exports for Malaysia and Indonesia.
After four months of growth, Malaysia’s CPO output contracted in May and June, likely attributable to slower productivity during the fasting month and Hari Raya holidays. Overall local production inched up 2% to 8.92 million MT in 1H 2018; this modest pace is likely to continue through the rest of the year. In the meantime, Indonesia retained its strong growth trend, with output rising 24% y-o-y to 18.37 million MT in 5M 2018.
On the demand front, Malaysia’s export performance declined in May and June, weighed down by the steep hike in Indian import duties on palm products (effective 1 March 2018) and Malaysia’s reinstatement of export taxes on CPO in May. Even so, overall exports still went up 5% y-o-y in 1H 2018. Elsewhere, Indonesian exports of palm oil slipped 6% y-o-y in 5M 2018 amid weaker demand from India and the EU. The increase in India’s import duties on soft oils – including SBO – effective 14 June 2018 is expected to reverse the downtrend in exports for both countries.
As at end-June 2018, the level of Malaysian palm oil inventory stood at 2.19 million MT – a stark contrast to a year ago (+43% y-o-y, +1% m-o-m) following the El Nino weather phenomenon. Indonesia’s inventory level hit 4.76 million MT as at end-May 2018 (end-December 2017: 4.02 million MT) – attributable to robust production growth and sluggish exports.
On a broader note, the US Department of Agriculture expects global supply of vegetable oils to advance 5% in 2017/2018, and 3% in 2018/2019. Production of SBO is estimated to rise a respective 3% and 4%, posing stiff competition within the global market for vegetable oils. On a brighter note, the recent large price premium of over USD200/MT for SBO against CPO may encourage a switch to the latter.
On the biodiesel front, Indonesia is planning to accelerate the use of its higher-blend B30 biodiesel to 2019 (from 2020), provided it passes the requisite road tests. The republic is also planning to extend the use of its B20 biodiesel to both subsidised and non-subsidised vehicles effective from 1 September 2018. If effectively implemented, the biodiesel consumption is estimated to come in at 4 million kilolitres this year (2017: 2.5 million kilolitres). The higher prices of crude oil of late remain supportive of discretionary biodiesel blending.
Karin Koh, CFA
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