Weak production to affect planters

Palm oil sector may experience slower demand and higher costs

PETALING JAYA: Local planters’ earnings will remain at risk given the anticipated weak palm oil production, slower demand and higher costs amid the uncertainties led by the Covid-19 pandemic, say analysts.

The latest decision by India, the world’s largest edible oil buyer, to suspend 39 licences to import 452,303 tonnes of refined palm oil after a surge in duty-free purchases from neighbours such as Nepal and Bangladesh, will also hurt the uptake of palm oil from Malaysia and Indonesia.

CGS-CIMB Research regional analyst Ivy Ng, when contacted told Starbiz, said palm oil supply is rising faster than demand, which was impacted by the movement control order (MCO) and lower crude oil prices due to the coronavirus.

“This will be a concern if the local palm oil stocks continue to rise over the next few months to above three million tonnes due to the limited storage,” she told Starbiz yesterday.

While there would be demand in the food-related sectors, Ng pointed out that “Sales volumes to hotels, restaurants and catering businesses are down as it was impacted by the restricted movement in the respective countries.”

In addition, if the crude oil prices stay weak, then demand for palm-based biodiesel will be negatively impacted.

“But this will be partially offset by recovery in demand assuming that Covid-19 is contained.

“So in the near-term there is a downside but this could recover if Covid-19 is under control and the economic activities improve due to some loosening of the MCO,” she added.

The Malaysian Palm Oil Board in releasing its latest palm oil statistics said that local inventory has increased to 2.05 million tonnes in April from 1.73 million in March.

This is on the back of an 8.3% higher CPO production at 1.65 million tonnes and slightly improved palm oil exports by 4.4% at 1.24 million tonnes.

Meanwhile, BIMB Securities Research in its latest report expected local palm oil stocks to remain elevated at current levels as “production enters into the productive season cycles”.

The research unit has estimated that a higher average selling price of palm oil would be insufficient to compensate for the expected weak production, slower demand and higher costs thus making it a risk to local planters’ earnings.

Furthermore, it believed that palm oil exports in the coming months would likely remain under pressure as Covid-19 pandemic prolonged with many countries adopting a slow approach in lifting the restrictions and their borders.

“We foresee that the drag on exports will likely persist until the end of this second quarter as most countries are still in lockdown or conditional MCO that could still be in effect up to this June.

“We are of the view that the tight supply situation on global vegetable oils including palm oil this year will normalise the demand for palm oil in the third or fourth quarter this year, as the disruption in supply chain will lead to firms increasing their use of current stocks, thereby encouraging restocking activities.”

From January to April, the MPOB’S average CPO price is higher by RM590 per tonne at RM2,602 per tonne against RM2,015 recorded in the same period last year.

BIMB Securities believed that “CPO price for May-june this year will trade within a range of RM1,900 and RM2,200 per tonne as the downside risk is still high for CPO price, given the anticipated lower demand and higher stockpiles, weak soybean oil prices and lower crude oil prices.”

Yesterday, the benchmark CPO futures contract for July closed RM22 lower to RM1,998 per tonne.

“We are of the view that the tight supply situation on global vegetable oils including palm oil this year will normalise the demand for palm oil in the third or fourth quarter.” BIMB Securities Research