High US dollar a blessing in disguise for palm oil exporters

Higher inventory: MIDF Research predicts an even higher palm oil inventory of 2.75million tonnes this month. – AFP

Higher inventory: MIDF Research predicts an even higher palm oil inventory of 2.75million tonnes this month. – AFP

THE alarming rise in palm oil stocks on the back of slow exports spells bad news for crude palm oil (CPO) prices for the rest of this year.

Since April, the local palm oil inventory has stayed above the 2-million tonne mark.

The situation will not likely improve soon as plantation analysts are predicting that palm oil stockpile for this month will hit a new all-time high above 2.6 million tonnes compared with 2.49 million in August.

Kenanga Research in its latest report expects inventory in September to scale higher close to 2.7 million tonnes as supply at 2.16 million tonnes exceeds demand at 1.95 million tonnes.

The forecast 2.7-million tonne inventory marks a new all-time high for the country’s palm oil inventory compared with 2.63 million tonnes recorded in December 2012.

Meanwhile, MIDF Research predicts an even higher palm oil inventory at 2.75 million tonnes this month, rising 10% month-on-month.

The research unit, however, is not overly concerned with the higher stockpile as the palm oil stock-to-usage ratio is expected to increase to only 12% against the record high of 13.4% posted in February 2013.

On the demand side, MIDF Research expects export to improve 4% in September from August as the current low prices should spur demand from price sensitive countries like India and Pakistan.

All considered, the research unit says the higher stocks level should still limit the CPO price upside momentum.

Given current circumstances, analysts envisage that the CPO average price for 2015 to range between RM2,175 and RM2,240 per tonne respectively.

However, one consolation amid the rising stocks and poor demand offtake is the weaker ringgit and rupiah against the US dollar that helps to cushion the revenue of oil palm plantation players in Malaysia and Indonesia.

A local planter points out: “A strong US dollar against weaker ringgit or rupiah normally will result in higher translated local revenue and profits for these planters who report their earning in ringgit or rupiah as CPO exports are traded in US dollars globally.”

“Furthermore, the bulk of these planters’ cost of production about 60% to 70% are mostly in their local currencies,” he adds.

The ringgit is at a 5-year low of 4.23 while the rupiah is at a 17-year low of 14,446.50 against the US dollar.

On the other hand, plantation companies with significant US dollar debts would probably need to report unrealised foreign exchange losses with the strong US dollar as they mark the debt to market but these are non-cash flow items.

Some analysts estimate that companies such as IOI Corp Bhd and Sime Darby Bhd would likely report relatively large unrealised translational forex losses given that their debts are US dollar denominated.

Meanwhile, Malaysian Palm Oil Association (MPOA) chief executive officer Datuk Dr Makhdzir Mardan tells StarBizWeek that the prolonged spike in palm oil inventory is a major concern among local plantation companies.

“To curb the excess stockpile in the market and the weak CPO prices, many planters have decided to accelerate their replanting programmes from this year onwards.”

Big planters

“Some of the major plantation companies plan to increase their replanting activities by 5% to 8% annually from the current 2% to 4% of their plantation hectarage.

“This could result in some 250,000ha being replanted nationwide and translate into some one million tonnes of crude palm oil (CPO) being taken out from the market within the next three months,” explains Makhdzir.

The MPOA members mostly represent the private plantation industry in Malaysia including the big planters such as Sime Darby Bhd, IOI Corp Bhd, Kuala Lumpur Kepong Bhd , United Plantations Bhd and Felda Global Ventures Holdings Bhd (FGV).

Of the total estimated five million ha planted with oil palm in Malaysia, three million ha belongs to the estate group and 1.5 million hectare owned by the smallholders.

MPOA members’ hectarage represent about 70% of the 3 million ha belongs to the estate group, says Makhdzir.

Of its members, FGV has been on an aggressive replanting mode with over 15,000ha per year. This is partly to address its old age tree profile of over 18 years, which represent about 30% of the group’s total planted hectarage.

As for Sime Darby, the group’s current replanting activities takes up about 4% or 13,968ha per year of the group’s total land bank.

On the international front, Malaysia and Indonesia – the world’s top two largest palm oil producers – will meet within a month to roll out a price stabilisation mechanism and strategies to counter the fall in CPO prices.

CIMB Research in its report says the price stabilisation measures, if rolled out successfully, could help improve CPO price sentiment in the near term.

It recalls that it was not the first time Malaysia and Indonesia governments to join forces to reverse the plunge in CPO prices.

Back in 2008, the two countries announced plans to cut annual palm oil output by 800,000 tonnes with the replanting of 50,000ha and 200,000ha of palm oil estates in Indonesia and Malaysia.

The research unit opomes that the potential measures to be implemented this time would be similar to those in 2008. The key difference between 2008 and today is that most of the infrastructure to implement biodiesel usage is now in place.

“As such, we expect both governments to be more effective in their efforts to raise domestic biodiesel demand compared with 2008.”

Another highly anticipated factor that will see CPO bounced back to above RM2,000 per tonne is the El Nino phenomenon.

It was reported that the severe El Niño in 1997-1998 had reduced palm oil yields by 17%, and prices jumped from about RM1,500 in 1997 to RM2,500 per tonne in 1998, according to Credit Suisse.

In fact, palm oil prices have increased between 7% and 125% during the last six El Ninos.

Even the stock prices for plantation companies rose between 6% and 25% during the last six events.

The latest, the National Oceanic and Atmospheric Administration and the Australian Government Bureau of Meteorology said that the El Nino conditions will continue until early March to April next year.

Palm Oil , Palm oil , stockpile