US-China trade war weighs on CPO price

Worries over a slower China’s economy, a key buyer of CPO, would hit CPO export from Malaysia


The escalating US-China trade war has weighed on crude palm oil (CPO), driving the prices of the commodity lower despite a continuous decline in inventories.

Malaysian Industrial Development Finance Bhd (MIDF) in a research report said, Malaysia’s CPO stockpile dropped by 6.4% month-on-month (MoM) to 2.7 million tonnes.

“The lower inventory level was primarily due to the higher export demand ahead of the Ramadhan season and decreasing output level amid the historically low seasonal output period,” the research house said.

But the drop had not been able to halt the price slump of Malaysia’s key export, which is hovering at its lowest level this year. Price for June delivery has settled at RM1,983 on the Bursa Malaysia Derivatives Exchange market.

For the first quarter of 2019, CPO prices dropped to its lowest RM1,853 per tonne. It reached a year-to-date high of RM2,157, but prices rebounded yesterday to around RM1,920 as the tension between Washington and Beijing eased.

The US last week shocked the world when it imposed a US$200 billion (RM840 billion) tariff on Chinese goods, creating a ripple effect on the global equity market. Billions were erased from stock markets from China to Indonesia.

Worries over a slower China’s economy, a key buyer of CPO, would hit CPO export from Malaysia. The world’s second-largest economy is seen as the potential market to buy more CPO in the event Malaysia loses key markets like the European Union (EU).

Malaysia is the world’s second-largest producer of CPO after Indonesia. Both Malaysia and Indonesia account for about 85% of the world’s CPO production.

MIDF said the export demand grew by 2.1% to approximately 1.6 million tonnes in April 2019.

A surge in demand was seen from key destinations, particularly China (17.2% MoM), followed by India (53.5% MoM), Indonesia (120% MoM), Iran (170% MoM) and the Philippines (19.2% MoM).

Meanwhile, production level recorded a marginal decrease by 1.4% to 1.6 million tonnes.

MIDF said this is expected, as palm oil is entering into its historically low seasonal production period.

“The plunge in price of soybean amid rising concerns of a global soybean glut continues to exert greater downward pressure on the price of palm oil,” it said.

The research house believes the declining demand from the EU and discounted pricing of Indonesia palm oil could be dampening factors to CPO price.

However, MIDF also believes that the strengthening of bilateral ties with China, Ramadhan season and higher domestic consumption for biodiesel will continue to support the CPO price.

The EU had proposed to outlaw palm oil biofuel as being environmentally damaging, threatening exporters like Malaysia and Indonesia.

Kuala Lumpur had also threatened actions against the EU if the world’s largest single-economic bloc pushed ahead with its agenda to ban palm oil biofuel. Indonesia has also voiced that it will react to any actions by the EU, including to take the matter to the World Trade Organisation.

Recently, it was reported that spirit exporters from the EU had found it difficult to enter the Indonesian market. It is not known if it had any relations to EU’s future action on palm oil.

Going forward, MIDF has maintained their ‘Neutral’ stance on the plantation sector, with an unchanged CPO price target of RM2,280 per metric tonne.

As for Hong Leong Investment Bank Bhd, the research house maintained its average CPO price assumptions of RM2,300 per metric tonne, pending further review following the recent escalation in trade tension between the US and China.