Palm oil prices likely to get a boost

Inventories fall: Malaysia May stockpile hit a 62-month low at 1.65 million tonnes, driven by low fresh fruit bunch yields on lagged effect of drought.

PETALING JAYA: Falling crude palm oil (CPO) stockpile in the country, which hit a five-year low in May, will boost prices of the commodity in the short term, but analysts say the impact on planters’ earnings will be harder to predict given the recent weak production numbers.

“It is still premature to expect a steep recovery in second quarter 2016 earnings versus full-year forecasts due to low second quarter 2016 output,” Maybank Kim Eng said in a report yesterday.

Malaysia May stockpile hit a 62-month low at 1.65 million tonnes, driven by low fresh fruit bunch yields on lagged effect of drought last year.

Analysts expect inventories to fall further this month.

“We expect CPO price to hit fresh highs of RM2,800-RM2,900 a tonne in June/July 2016 following the low stockpile before CPO price starts to retrace when output picks up from August,” it said.

The average CPO price for the first five months this year improved 15% year-on-year (y-o-y), but this was insufficient to offset the 17% yoy drop in output from the Malaysian estates over the same period, CIMB Research said in its report.

“We expect CPO prices to trade in the range of RM2,500-RM2,800 per tonne in June 2016 and average RM2,450 per tonne in 2016 and RM2,600 in 2017, maintaining our ‘neutral’ sector rating,” it said.

According to Bloomberg data, CPO prices have dropped 9% from a high of RM2,779 in March, but is up 1.8% for the year at RM2,530 a tonne.

CIMB Research said the main bullish factors for prices were risk of lower palm oil supplies due to El Niño as well as potential La Nina, lower soybean supplies due to weather disruption, and higher biodiesel mandates in Indonesia and Malaysia.

“Factors capping the CPO price upside currently are release of rapeseed oil stocks by the Chinese government, competition from soybean oil, and slower global economic growth,” it said.

Meanwhile, UOB Kay Hian Research said that CPO prices should strengthen again only in late the late third quarter this year as the recovery in CPO production will not be as strong as market’s expectations.

Meanwhile, Kenanga Research said that June 2016 exports would strengthen 4% to 1.33 million tonnes, driven by stronger Indian demand and flat demand in the remaining key markets.

The research house said India remained a bright spot with year-to-date exports coming in 88% above the eight-year average and 12% above May 2015 year-to-date exports.

“In June 2016, we expect this trend to continue, with below-average demand seen in all key markets except India,” it said.

For the first five months this year palm oil exports were flat, while exports to China registered a sharp drop of 50.7% year-on-year, UOB Kay Hian Research said.

This is probably due to high influx of soybean into China’s market as the strong demand for animal feed has led to a higher crush volume and higher production of soybean oil, it said.

“The increase of soybean oil in the market would reduce the demand of palm oil,” the research house said.

On top of this, the price discount between palm oil and soybean oil has narrowed to US$85 per tonne in May 2016, from a historical average of US$140 per tonne, making palm oil less competitive.

It expected crude palm oil prices to trade in the range of RM2,400 to RM2,800 per tonne in the second half this year after suffering a drop of 1.1% month-on-month on May 16 due to the expectation of a production recovery and concerns over weaker demand from India and China.