Domestic, external challenges continue downward pressure on CPO price
KUALA LUMPUR: The downward pressure from both domestic and external developments on crude palm oil (CPO) price will continue to persist, the research arm of MIDF Amanah Invesmtent Bank Bhd (MIDF Research) observed in its latest report.
According to MIDF Research, on the local front, Malaysian palm oil stockpiles remain elevated at above three million tonnes due to the relatively high production and lacklustre export demand.
Moving forward, the research arm viewed that the upcoming low production season would not lend much support in reducing the record high inventory level.
“Moreover, we anticipate the export demand outlook to remain bleak amid continuing geopolitical uncertainties and moderating growth of key trading partners.
“As such, we do not foresee notable recovery of CPO price in the near term,” it said.
MIDF Research foresees average CPO prices to decline marginally by -0.6 per cent to RM2,280 per metric tonne (MT) in 2019, compared to RM2,293 per MT in 2018.
“The slight contraction in CPO price has little effect on Malaysia’s overall gross domestic product (GDP) by -0.02 per cent. Net exports to shrink by 0.5 per cent.
“Sector-wise, output of oil palm will decrease slightly by 0.5 per cent with the 0.6 per cent drop anticipated in prices. This will be followed by vegetable and animal oils and fats (-0.2 per cent).”
MIDF Research noted that the current Indonesia CPO price discount of between US$12 to US$17 per MT in comparison to Malaysia has been putting the latter in a less competitive position.
“This is mainly due to the Indonesia’s abolishment of the export levy on CPO and its derivatives products as well as the larger volume capacity to cushion the lower pricing of its palm oil.
“Hence, Malaysian palm oil continues to be pressured to lower its pricing in order to remain competitive.
“We also noted that the price discount remains unchanged in spite of the zero export levy in Malaysia.”
Going forward, the research arm opined that the sustained high production in Indonesia, coupled with zero export levies will allow its domestic CPO to continue trading at a discount.
Overall, MIDF Research highlighted that in view of the negative developments, the current landscape of the palm oil industry in Malaysia seems to be challenging.
“Despite the seasonally low production cycle where price should be relatively high, we continue to observe that there is still no sight of sustained CPO price recovery as stockpiles remain elevated.
“Meanwhile, the strong backlash from EU towards palm oil via the ban on palm oilbased biofuels and record high competing oilseeds would serve as dampeners to the demand of CPO.
“The less competitive pricing of Malaysian CPO as compared to that of Indonesia will potentially add downward pressure on the domestic palm oil movement.”
On a positive note, the research arm viewed the rampup in biodiesel mandate locally, strengthening trade ties with China and preferential trade agreement with India to lend support to the Malaysian CPO price.