Published on 22 Aug 2019.
RAM Ratings has revised downwards its CPO price forecast to an average of RM2,000/MT-RM2,200/MT for 2019 (from RM2,200/MT-RM2,400/MT previously). CPO prices have been persistently weaker than expected, averaging 17% lower y-o-y at RM1,977/MT in 7M 2019. Strong production growth and concerns about the impact of unresolved US-China trade tensions on demand for edible oils have been a drag on prices.
On the supply front, both Malaysia and Indonesia continued to register robust production growth. Local CPO production rose 11% y-o-y in 7M 2019 due to improved yields. Indonesian output grew 16% y-o-y in 1H 2019 amid progressive maturing of oil palms into higher-yielding phases. In the wider global vegetable oil market, the US Department of Agriculture estimates the supply of vegetable oils to expand 3% in 2018/2019 and at a slower 2% in 2019/2020.
In regard to demand, Malaysia’s crude and processed palm oil exports climbed 15% y-o-y in 7M 2019, driven by greater demand from India, China and the US. Soft CPO prices and zero export duties since 1 September 2018 had encouraged increased purchases of the tropical oil. In addition, India’s reduced import duties on CPO and refined palm oil products, effective 1 January 2019, caused Malaysian palm exports to India to double to 3.0 mil MT in 7M 2019. Indonesian exports of palm products had also risen, ticking up 10% in 1H 2019, underpinned by stronger demand from China and the EU.
As at end-July 2019, Malaysia’s inventory level stood at 2.4 mil MT – still 7% higher y-o-y, albeit on a m-o-m declining trend since early 2019. Although Indonesia’s stockpile declined 27% y-o-y to 3.5 mil MT as at end-June 2019, it has inched up m-o-m since March owing to robust production growth.
For the rest of the year, we expect CPO prices to be sustained above RM2,000/MT – a level seen of late. Production growth in Indonesia is anticipated to moderate in 2H 2019 on the back of dry weather and biological stress after two years of strong output growth. Meanwhile, demand for CPO is envisaged to remain supported by food-based consumption growth and demand for biodiesel production. The huge discount of CPO to soybean oil (USD245/MT in July 2019) will also encourage some switching to the former.
Karin Koh, CFA
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(603) 3385 2577
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