CPO prices to gradually rise in 2019, stockpiles remain high in 1Q

El Nino may boost prices as it impacts CPO production, while inventory rationalisation is widely expected in 2019


Crude palm oil (CPO) prices, which hit a record low of RM1,773 per tonne last year, are expected to post a rebound in 2019 as unusually dry condition and reduced inventories could help Malaysia’s key commodity.

Australia’s Bureau of Meteorology alerted a 70% chance of El Nino phenomenon occuring, triggered by the recent warming of the Pacific Ocean.

The World Meteorological Organisation said in November there is a “75%-80% chance” of a fully-fledged El Nino effect by February.

Historically, El Nino impacts CPO production, helping to boost prices of the commodity, which accounts for RM77.8 billion in the country’s export value in 2017.

Between 2009 and 2010, El Nino helped CPO prices to trade between RM2,500 and RM3,000 per tonne.

Inventory rationalisation is widely expected in 2019, despite stocks hitting an all-time high of three million tonnes in November last year.

CPO inventories are expected to rise in the first quarter of 2019 (1Q19), but will stabilise due to rising demand in key markets and higher domestic biodiesel blend mandate.

Malaysia has mandated the implementation of 10% biodiesel blend (B10) and 7% biodiesel blend (B7) for the transportation and industrial sectors respectively in phases from Dec 1, 2018.

The initiative has set for the B10 biodiesel mandate to be completely implemented by Feb 1, 2019, for the transportation sector and July 7, 2019, for the industrial sector.

The higher blend of palm oil in biodiesel is expected to increase the domestic demand to 760,000 tonnes annually and contribute only 2.2 parts per million carbon dioxide to the greenhouse gas emission savings yearly.

Sabah-based IJM Plantations Bhd CEO and MD Joseph Tek said the expected higher domestic and international demand will boost CPO prices amid IJM’s prediction of better crop yields.

“We are optimistic the CPO prices will improve in 2019, riding on higher exports against the backdrop of sustained and rising demand, although crop production will also rise in tandem with better crop yields and higher production compared to 2018.

“Probably the most important bullish factor will be the sustained expansion of mandatory biodiesel use, which will further support prices,” he told The Malaysian Reserve.

Tek said the company does not see a significant jump in production.

“The ageing oil palm trees, replanting activities, a slowdown in recent new plantings and field crop losses due to labour constraints will curb any significant jump in our production,” he said.

Tek also believed that palm oil-producing firms will compete based on their strengths.

“All palm oil-producing countries are intricate in terms of their business model. We are more of a “price taker” rather than “price maker”.

“Unfair competition happens when there is a non-level playing field involving trade, environment and politics. Solidarity among palm oil-producing countries is imperative,” he said.

However, Hong Leong Investment Bank Bhd (HLIB) said palm oil inventories will remain high in 1Q19, largely driven by weaker exports arising from the winter season and lower festive-driven demand.

“We maintain our ‘Neutral’ stance on the sector and we remain less sanguine on the sector’s near-term earnings growth prospects, at least until 1Q19, mainly on the current weak CPO price environment,” HLIB said in a report.

The research firm noted that the commodity’s palm oil inventories have increased for the sixth consecutive month, rising by 10.5% month-onmonth to 3.01 million tonnes in November, as seasonally lower output was outweighed by a plunge in exports.

PublicInvest Research is projecting palm oil inventories to move between the range of 2.7 million and 2.9 million tonnes in 1Q19 as the demand from China subdues, coupled with Indonesia’s aggressive move in flushing its high inventory level.

“Not only (are they) facing stiffer competition from Indonesia, which is facing an excess supply, Malaysian plantation players are also experiencing various attacks from Europe, namely non-governmental organisations, activists and environmental-friendly groups.

“We believe such negative publicity would continue to affect palm oil demand from Europe, which is the world’s third-largest consumer,” PublicInvest Research said.