Commodities sector sees strong headwinds in 2018
KUALA LUMPUR: The local commodities sector, namely crude palm oil (CPO), rubber, tin, and gold continued to face strong headwinds in 2018 as the global economy struggled to find its footing.
For instance, CPO, which is the country’s second biggest contributor to the economy, saw a price decline of about 20 per cent year-todate due to weaker fundamentals, especially so as its inventory level was nearing three million tonnes as reported by the Malaysian Palm Oil Board (MPOB).
Traditionally, the edible oil’s lifecycle will start the year with a lower output but higher exports due to the festive seasons, namely the Chinese Lunar New Year and Hari Raya Aidilfitri, as consuming countries stock up palm oil for cooking and food products.
“The production generally tend to peak later in the year moving towards the fourth quarter, in line with seasonality pattern,” said Phillip Futures Sdn Bhd’s derivative dealer David Ng.
However, other edible oils, the likes of soybean, rapeseed and sunflower, are also experiencing similar patterns, thus resulting in higher inventory for Malaysian CPO amid lower demand, hence, pressuring the price to dip to below RM2,000 per tonne in November, the lowest in five years.
Concurring with this view, plantation veteran M R Chandran said the commodities markets worldwide were going through a recession in 2018.
“China and India, the world’s biggest consumers of palm oil, had slowed down their purchases as their own crop production have been much better,” he said.
Meanwhile, the MPOB noted that the three million tonne-mark in November was the highest stockpile level recorded in nearly two decades, and it was expected to increase further.
During the month, the CPO price also suffered its biggest fall in more than 21 months after Indonesia announced measures to increase shipments.
The republic, which is the world’s biggest CPO producer, had temporarily erased its export levy to zero from a range of US$20US$50 per tonne, to boost its palm oil exports.
An independent inspection company, AmSpec Agri Malaysia, said that the exports of local palm oil products for the first 15 days of December fell 4.6 per cent to 524,083 tonnes from 549,488 tonnes shipped during the same period in November.
As at Dec 13, CPO futures prices ranged from RM1,700 to RM2,600 per tonne in 2018 compared with RM2,400 to RM2,900 per tonne recorded in the same period in 2017.
The CPO price is expected to average at RM2,300 per tonne in 2019 versus RM2,100 this year, owing to better fundamentals due to higher demand amidst lower output.
“At RM2,300 per tonne, buying support for CPO next year will come from Indonesia, home to 264 million people.
“This is especially so with the government’s mandate to utilise CPO for B20 in the automotive industry, on top of using the commodity for food products.
The larger consumption calls for higher demand,” a dealer said.
B20 is a blend of 20 per cent biodiesel and 80 per cent petroleum diesel.
Since Sept 1, 2018, all vehicles and heavy machinery in the republic with diesel engines will have to use the fuel in a move to help the government save billions of dollars in diesel imports.
With this, there is no doubt that by 2019, Indonesia could be the world’s biggest palm oil consumer, even overtaking China, while India would take second place.
“We can expect that this, together with the impact of the monsoon season in December, will help cut stockpile and push the price upwards,” the dealer said.
Prices, too, will be supported by demand from India beginning January next year with the reduction in import duty to 40 per cent from 44 per cent for CPO and to 45 per cent from 54 per cent for refined palm oil by endDecember.
Meanwhile, Kenanga Research has forecast the December output to fall by 6.4 per cent month-onmonth to 1.73 million tonnes, representing the median of 20152017’s December decline.
“All in, we anticipate supply of 1.79 million tonnes to exceed demand of 1.66 million tonnes in December, leading to higher ending stocks of 3.14 million tonnes (+4.3 per cent month-onmonth), marking the seventh consecutive monthly increase.
“We expect CPO prices to recover to RM2,200-RM2,250 per tonne in January on seasonal production slowdown and higher festive demand,” it said.
On another development, the Malaysian palm oil continued to be bombarded by the European Union (EU) to boycott the commodity, claiming the crop production had caused environmental degradation and deforestation, including destroying the orangutan habitats.
But both top producers--Malaysia and Indonesia, which contributed 80 per cent of the world’s palm oil supply, did not wait any second to tackle the issue.
The latest was when both countries persuaded the British government to take action after a supermarket chain, Iceland, announced it was removing palm oil from its own-brand products.
Primary Industries Minister Teresa Kok rapped the “lame excuse” by the EU to ban the commodity as Malaysia had done much effort in terms of conserving the environment, including through tree-replanting programmes.
She pointed out that Malaysia still maintained more than 50 per cent of its forest cover, and come December 2019, the government will make the Malaysian Sustainable Palm Oil ( MSPO) certification mandatory, as a move to elevate the industry to global standards.
This will further brand Malaysian palm oil as sustainably produced and safe, hence, pushing the price upwards while opening more global markets and changing the mindset of the consumers in the EU.
As for other commodities, the local rubber sector was also facing a challenging year amid low global prices and declining output due to the rainy season.
The escalating trade war between the US and China has dampened the manufacturing sector’s performance, resulting in lower demand for the Standard Malaysian Rubber (SMR) grades, thus weakening the price.
This has an impact on the wellbeing of the smallholders who account for 90 per cent of the rubber production in the country.
Malaysia Rubber Board directorgeneral Datuk Dr Zairossani Mohd Nor was reported as saying that Malaysia could only produce around 750,000 tonnes, which was below its capacity level as there are 41 factories processing rubber with the capacity of producing about 1.5 million tonnes per year.
In addressing this issue, the government has agreed to raise the activation price under the Rubber Production Incentive (RPI) scheme to compensate tappers’ losses during the decline in global rubber price.
“The RPI was created to allow rubber tappers to earn at least a standard amount per kg and the government will pay the amount lost when the rubber price declines.
“Since its introduction in September 2015, it has been raised twice from the initial price of RM1.75 to RM2 and RM2.20 per kg,” he said.
From RM2.20 per kg, Zairossani said the RPI activation price will be raised to RM2.50 per kg starting January 2019.
According to the Malaysian Rubber Exchange, the SMR 20, which is the country’s rubber pricing benchmark, traded between a high of RM6.03 per kg and a low of RM5.11 per kg for the JanuaryOctober 2018 period.
Meanwhile, he noted that the country exported about 1.1 million tonnes of SMR products, worth up to RM9 billion annually.
Malaysia is expected to meet its International Tripartite Rubber Council members – Thailand and Indonesia, to propose a supply management scheme by imposing production quotas for major producing countries in an effort to reduce the surplus and shore up prices.
“Rubber price could continue to be depressed, reflecting increased output due to very favourable weather conditions in Thailand and Vietnam, the world’s top suppliers, and weak demand from China, leading to an unusually high stocks accumulation.
“I think rubber will remain very sensitive to the trade war,” Head of Trading at Oanda Asia-Pacific Stephen Innes said.
As for tin, the metal price on the Kuala Lumpur Tin Market (KLTM) has been on a downtrend, declining since January onwards.
Tin price went down to US$18,450 per tonne in November from its high of US$22,105 per tonne earlier in March, in tracking the metal price on the London Metal Exchange.
A Kuala Lumpur-based trader said there was a recovery in the tin price when the Indonesian Trade Ministry reported a decline in the republic’s tin exports.
“The news boosted the local tin price and it rose to above US$19,000 per tonne in December,” he said, adding that throughout the year, the market had been impacted by escalating trade war between the world’s two biggest and rival economies – the US and China.
As China is a huge economy, any developments in the republic will affect supply and demand, and in turn prices.
To recapitulate, US President Donald Trump had imposed a 10 per cent tariff on US$200 billion worth of Chinese goods and expect to raise this further to 25 per cent by year-end.
The decision to raise the tariff was put on pause mode post G-20 meeting when both leaders, Trump and Chinese President Xi Jinping, agreed to halt new trade tariffs for 90 days to allow for talks.
The dealer said moving forward the market would continue to be volatile, causing trade to be based on sentiment instead of fundamentals.
“We can’t predict the outlook for tin, it is still in uncertainty (mode) and traders will be on a wait-andsee attitude.
But if the price goes up, beyond US$19,000 per tonne, we could possibly see it continue on an upward trajectory,” the dealer said.
In 2018, buying demand for tin were from countries such as China, South Korea, Japan, Taiwan, Germany, Pakistan, Bangladesh and the US.
As for the gold futures market, the precious metal currently trades at RM161.02 a gramme on Bursa Malaysia Derivatives.
The market did not perform well this year, in line with the weaker price on the benchmark New York Commodity Exchange’s (Comex) gold futures.
Phillip Futures Sdn Bhd dealer Leo Goh Boon Hao said weak sentiment clouded the market amidst continued tension between the US and China.
“The Comex gold futures traded between US$1,180 and US$1,300 per ounce (this year).
“On the local bourse, the gold futures price declined to its 52month low of RM155.20 a gramme in August 16, 2018, from a 52-month high of RM170.
90 recorded on Jan 15,” Goh said.
The gold price is expected to be more sensitive to geopolitical risks in 2019, as well as uncertainties including global economic slowdown, US-China trade war, US interest rate hike and declining global equities.