Rising output to weigh on CPO price outlook
Other concerns include low oil prices and higher oilseed production
PETALING JAYA: Rising production, which is projected to linger to the third quarter of the year, will weigh on crude palm oil (CPO) price outlook.
CPO prices has been on a downward trend since January this year. It has dropped 22.26% to close at RM2,459 on Friday.
While analysts expect the production recovery this year given that the El Nino phenomenon had impacted production in the previous two years, OverseaChinese Banking Corp Ltd (OCBC) economist Barnabas Gan said other concerns overshadowing CPO prices include low oil prices and higher oilseed production.
“With the falling oil prices over the last years, gasoline prices have fallen sharply in tandem and left the rather costly substitute – biodiesel on the shelf.
“Statistically, gasoil futures are already 31% cheaper compared to unrefined palm oil, making CPO as a biodiesel not only expensive, but also enormously unviable,” said Gan.
He pointed out that global biodiesel demand will likely taper into 2018, driven by low oil prices.
OCBC estimated that Malaysia’s CPO production will rise by 15% this year. CPO production had gained for six consecutive months into May, averaged 18.8% in five months of 2017. This tracks the strongest growth since 2008 over the same period.
The Malaysian Palm Oil Board’s latest statistics showed that CPO production for May amounted to 1.65 million tonnes, up 21.2% from 1.36 million tonnes, in the same month a year ago.
Gan said global oilseed production has been healthy underpinned by higher soybean production in Brazil and Argentina, according to US Department of Agriculture.
Global stocks rose by 3.1 million tonnes to 93.2 million tonnes during the same period.
“Soybean, a key substitute to palm oil, is projected to grow higher given strong yields in recently harvested areas, especially in Rio Grande, Brazil,” he said.
Considering the above factors, OCBC downgraded CPO price outlook to RM2,250 per tonne at year-end from May’s forecast of RM2,650.
Meanwhile, AffinHwang Capital has a more positive outlook for CPO, deeming the growth in exports to balance out the production uptrend.
Malaysia palm oil inventory level of 1.56 million tonnes as of May was lower than MIDF Research’s estimate of 1.6 million tonnes and consensus estimate of 1.61 million tonnes.
“The surprise factor is the stronger than expected export growth at 17% month-on-month to 1.51 million tonnes,” it said, adding that this could be due to higher demand for palm oil from India and Pakistan due to restocking activity ahead of Ramadan.
AffinHwang kept a “neutral” rating on plantation sector and maintained its CPO average selling price assumption at RM2,600 per tonne for 2017.
It believed that the downward pressure on CPO prices could prevail in the second half of 2017 onwards, on higher CPO production, rising soybean output and strengthening of the ringgit against the US dollar towards year-end.