CPO production rises in East Malaysia, prices likely to remain at RM2,000
KUALA LUMPUR: A spike in crude palm oil (CPO) production, combined with lower exports to India a er its import tariff increase, will likely exert pressure on CPO prices for the remainder of 2019 to stay in the RM2,000 levels.
Affin Hwang Investment Bank Bhd (AffinHwang Capital) saw that Malaysia’s CPO production in August this year increased by 4.6 per cent month on month (m-o-m) and 12.4 per cent year on year (y-o-y) to 1.82 million metric tonnes (MT), due to higher production in Sabah and Sarawak.
To note, CPO production in Sabah and Sarawak climbed by 4.5 and 17 per cent m-o-m to 399,200MT and 447,800MT respectively, while production in Peninsular Malaysia declined slightly by 0.2 per cent to 974,600MT.
“We expect production to continue to increase over the next few months and peak in the final quarter of 2019 (4Q19), prior to the monsoon season,” AffinHwang Capital opined in a sector outlook yesterday.
“Overall, Malaysia’s CPO production for the first eight months of 2019 was up by 10.8 per cent y-o-y to 13.35 million MT, underpinned by improving fresh fruit bunch (FFB) yields and CPO oil extraction rates throughout Malaysia.
“We expect Malaysia’s 2019 CPO production to rebound to circa 20 million MT from 19.5 million MT in 2018.”
Separately, MIDF Amanah Investment Bank Bhd (MIDF Research) saw that Malaysian palm oil stockpiles in August 2019 declined by 10.1 per cent y-o-y to 2.2 million MT, representing the first year-over-year decline since July 2017.
This was mainly due to growth in export of 57.6 per cent y-o-y which outpace the increase in production of 12.4 per cent, it said. “However, the inventory level still came in higher than both Bloomberg and Reuters consensus by 1.4 per cent y-o-y. Meanwhile, we are of the view that the export demand to taper off in coming months due to India’s recent increased rate of duty of customs.
“Coupled with the seasonal higher production level, we believe this could cause the inventory level to remain elevated and provide some resistance to the recovery in CPO price.”
On a year-over-year basis, August 2019 export rose by 57.6 per cent to circa 1.7 million MT< which MIDF Research a ributed to large purchases from India which rose by 307.2 per cent y-o-y to 566.2 million MT.
“We believe this could be due to advance purchases by commercial buyers in India before the increase of import duty by five per cent on Malaysian refined palm oil,” it added.
“We gathered that the hike would be effective from September 4,2019 for 180 days which would weaken export demand.
This is primarily premised on Malaysia losing its preferential tariff treatment and will be competing on a level playing field with Indonesia at 50 per cent whose palm oil has a competitive pricing advantage than Malaysian palm oil.
“Nonetheless, we opine that the export demand from China could possibly further strengthen in view of the African swine fever and the heightened US-China trade war.
“This would result in tight supplies of soybean oil as there was lower crushing of soybean. Note that palm oil is a close substitute to soybean oil.
"We believe this could partially offset the expected decline from India’s export demand.
“Moving forward, we are of the view that export demand to trend lower in coming months.”
Meanwhile, Kenanga Investment Bank Bhd (Kenanga Research) said increasing production leading up to peak production period in October/ November, and lower exports to India after the import tariff increase are likely to lead to burgeoning stockpiles in the coming months, exerting pressure on CPO prices.
“As such, we are maintaining our CY19 CPO price forecast of RM2,000 per cent MT and underweight stance on the sector.
"However, we will closely watch production and exports to China and India in the coming months.”