Published on 08 Nov 2018.
RAM expects CPO prices to average RM2,300/MT-RM2,500/MT in 2018 and 2019. Our forecast for next year reflects our anticipation of stable production growth along with a pick-up in demand from food-based consumption growth and for biodiesel production (as higher crude oil prices continue to support discretionary blending).
CPO prices averaged RM2,338 per MT in 9M 2018 – about 18% lower y-o-y due to larger inventories and lingering concerns over the rise in stock levels amid the current peak production season. As at end-September 2018, Malaysia’s inventory level had increased to 2.54 million MT (+26% y-o-y) while Indonesia’s stockpile stood at 4.59 million MT (+71% y-o-y). We do not foresee any major downside risk to the present weak prices.
Local CPO production slowed down unexpectedly in recent months, suppressed by poorer productivity in key producing states such as Sabah and Perak. Malaysia’s CPO output came up to 13.90 million MT in 9M 2018 – a slight 2% lower y-o-y. Domestic production may thus be reduced this year relative to initial expectations. However, it is envisaged to increase at a low single-digit rate in 2019, thanks to better yields. In the meantime, Indonesia has been charting a strong growth trend; its output expanded 19% y-o-y to 30.67 million MT in 8M 2018. The republic’s production is also envisaged to increase at a single-digit rate next year.
On the demand front, Malaysia’s crude and processed palm oil exports turned around in September 2018 (+7% y-o-y) after four months of declines. Weak CPO prices and zero export duties since 1 September 2018 have likely spurred the buying of this tropical oil. India – one of our key export markets – also stepped up purchases of palm oil products in September (+20% y-o-y). This follows the increase in its import duties on soft oils – including rival soybean oil (SBO) – in June 2018, which had rendered CPO prices more competitive against other vegetable oils. On the whole, Malaysian exports of crude and processed palm oil products were still down 1% y-o-y in 9M 2018 while Indonesia posted a 2% y-o-y drop in 8M 2018. Demand for palm oil is expected to pick up going forward, supported by food-based consumption growth and demand from biodiesel producers.
On the global front, the United States Department of Agriculture estimates the supply of vegetable oils will expand 3% in 2018/2019 (2017/2018: +4%). The ample supply of vegetable oils will continue posing keen competition against CPO in the global market. Nevertheless, weak CPO prices and the large premium SBO commands over the former will encourage some switching from the latter. China’s imposition of a 25% import tariff on US soybeans will also create some demand for other vegetable oils, including CPO, over the longer term.
Karin Koh, CFA
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