Lower stockpiles, stronger exports and haze to boost CPO prices
PETALING JAYA: Crude palm oil (CPO) prices are on the rise, as lower stockpiles in Malaysia, stronger exports and the dry, hazy weather conditions give a positive outlook for prices heading into next year.
Yesterday, the third-month benchmark CPO futures for December contract on Bursa Malaysia Derivatives Exchange shot up to a high of RM2,297 per tonne before closing RM61 higher at RM2,282 per tonne, as the current haze situation in the South-east Asian region continued to worsen.
According to CIMB Investment Bank’s regional head of plantation research Ivy Ng, while CPO prices are gaining from investors’ optimism based on current conditions, it is too soon to tell whether the rise in prices would be sustainable.
She told Starbiz that “investors are relieved that the palm oil stockpiles are not accumulating as the seasonal peak production period approaches.
“There is also optimism on the strong exports, mainly to China and India last month”.
The current dry and hazy weather, Ng said, was also making investors more positive on the outlook for CPO prices.
Palm oil stocks in Malaysia fell to a 13-month low at the end of August, as strong exports outpaced the increase in production.
Data from the Malaysian Palm Oil Board showed that stockpiles had fallen for the sixth consecutive month in August, down 5.3% from a month earlier to 2.25 million tonnes the lowest since July 2018.
Exports, meanwhile, rose 16.4% last month and 58% year-on-year (y-o-y) to 1.73 million tonnes, on strong demand from India, China, Pakistan and the EU.
The increased exports were on the back of the Mid-autumn festival, the attractiveness of CPO prices against its key substitutes and ahead of the widely-anticipated hike in import duties by India on Malaysian refined palm oil products.
“At this juncture, it is too early to estimate the impact of the haze on production - it would depend on the degree of the haze, how long it lasts and which areas are impacted,” Ng pointed out.
However, she said, if current conditions persist for more than two months, there could be a cause for concern as it could impact fresh fruit bunch yields, mainly due to lower rainfall and lack of sunshine.
“If the haze persists, it will be positive for CPO prices going into next year,” she said.
During the previous severe South-east Asian haze season between June and October 2015, CPO supply from Indonesia and Malaysia fell 3.5% and 13%, respectively, in 2016. CPO prices, on the other hand, rose 23% y-o-y to RM2,653 per tonne.
Worsening haze conditions in the region led to Indonesian President Joko Widodo, also known as Jokowi, ordering a crackdown on individuals and companies responsible for forest fires during a limited Cabinet meeting in Pekanbaru in Riau yesterday, according to a Bloomberg report.
In Malaysia, more schools in Port Dickson and Nilai were ordered to close after the Air Pollutant Index reading hit over 200 yesterday, while the Department of Environment has issued a nationwide ban on open burning until the south-west monsoon ends in late-september.
Meanwhile, during a press conference yesterday, FGV Holdings Bhd said the current haze is expected to hurt its oil extraction rate next month and impact its production during the first half of next year.
Its COO of the plantation section, Syed Mahdhar Syed Hussain, said it was expecting a 0.2% to 0.5% impact on the oil extraction rate, which “is significant, given the volume of CPO we produce”.
Another research house, however, does not expect the current dry phase to have a significant impact on yields unless it persists for a few more months.
“Unless there’s a prolonged drought, we believe the impact on output in 2020 would be only slightly negative.
“However, the bigger concern for 20202021 is the slower growth in mature oil palm areas due to the lack of new plantings in Indonesia and Malaysia since 2015,” Maybank Kim Eng Research said.
As supply tightens, the research house said it expects the CPO price to strengthen into 2020.
Ng, on the other hand, said the outlook for production and exports would determine whether the recent spike in CPO prices would be sustainable.
Aside from the impact of the haze on production, another factor to consider is India’s recent tax increase on refined palm oil from Malaysia from 45% to 50%, for a period of six months.
The tax, which came into effect early this month, could hurt Malaysia’s exports to the country.
“We will have to wait and see whether the move would affect demand from India,” said Ng, who is maintaining the research house’s end-2019 CPO price forecast of RM2,100 per tonne.
Despite rising CPO prices, local plantation stocks on Bursa Malaysia were traded mostly mixed yesterday.
Top planters, Sime Darby Plantation Bhd added two sen to RM4.88, IOI Corp Bhd rose one sen to RM4.42 while Kuala Lumpur Kepong Bhd fell 16 sen to RM23.58.