The rise of CPO

CPO is expected to inch higher until 2Q, helped by seasonal conditions and rising exports especially to India and China


Crude palm oil (CPO) price rose to a new five-month high last week and the prospects of further gains have injected hope for the commodity, which faces staunch opposition in Europe, long-extended oversupply and weak prices.

Price for the commodity inched higher to RM2,094 last week after hitting a three-year low of RM1,718 in November, dragging the Bursa Malaysia Plantation Index to 6,446.63, a level that was last seen in 2010 and easing billions from planters’ market capitalisation.

Malaysia, the world’s second-largest producer of palm oil, had witnessed exports of the commodity and its related products posting stronger figures in January. China’s import of palm oil is expected to increase this year as the trade spat with Washington had forced Beijing to reduce imports of soybeans from the US.

The low CPO price had made the commodity less expensive compared to other contending oils, helping the sector to mop up the glut which had dragged the sector for months.

The commodity, which posted gains on eight consecutive days since the middle of this month, is expected to inch higher until the second quarter (2Q) of this year, helped by seasonal conditions and rising exports especially for Malaysia’s two largest buyers — India and China.

MIDF Amanah Investment Bank Bhd analyst Martin Foo said the lower cyclical production, which occurs during the first half of the year, and the holding-back effect from India’s import activities will help cushion the price.

“The palm oil production is projected to be weak in the first two quarters, and the lacklustre production is often negatively correlated to the price.

“If you look at the seasonality factor, the production will decrease before it peaked in the 3Q onwards,” he told The Malaysian Reserve.

“Also, India’s imports are expected to rise as they have been holding off in buying the crop last year due to the anticipation of reduced tariffs.

“Now that the country has lowered its import tax on palm oil, they are expecting to contribute in (buying) Malaysia’s exports,” he said.

India and China alone imports 4.3 million tonnes of palm oil from Malaysia, almost half of the exports to major markets, according to Malaysian Palm Oil Council’s website.

The trade war between the US and China may have slowed global growth, but it also opened up the door for Beijing to stop importing soybeans and opt for CPO.

Foo said Chinese investors losing interest in US soybean due to trade tension will put palm oil in a better and more favourable light to global buyers.

“The demand has switched to palm oil and it has helped the price to even out. We expect the weakest price movement for the crop will be in the 3Q as the production will peak (then),” he said.

According to the Bursa Malaysia Derivatives Exchange, the benchmark palm oil contract for April delivery gained 0.9% to RM2,283 at the close last Thursday, while charting the highest in five months on the Chicago Board of Trade.

Foo said Malaysia’s high inventory level could be stabilised at 2.5 million tonnes as the deadline approaches for the transportation and industrial sectors to upgrade their biodiesel usage to a higher palm oil-diesel blend.

“The mandate to increase the consumption of palm oil in the transportation and industrial sectors will help reduce Malaysia’s inventory level and stabilise at 2.5 million tonnes by year-end.

“The programme will lend a hand in reducing pressure on the palm oil price.”

According to statistics released by the Malaysian Palm Oil Board, the total palm oil stockpiles rose 6.91% month-on-month to 3.21 million tonnes in December 2018 and 17.6% higher year-on-year.

The B10 mandate, which requires petrol stations to provide B10 biodiesel by February 2019, is estimated to consume about 761,000 tonnes of palm oil annually.

While the price has been on the uptrend, the outcome of France’s action to outlaw palm oil would impact the country.

Malaysia has sent a formal complaint to Paris over the proposed ban and would retaliate with similar actions against products from Europe’s third-largest economy.