KUALA LUMPUR: RAM Ratings lowered its crude palm oil (CPO) price forecast to an average of RM2,200 and RM2,400 a tonne in 2019 from RM2,300 and RM2,500 previously.
It said on Monday CPO prices have been persistently weaker than expected (1Q 2019: RM2,017), weighed down by strong production growth that has in turn raised inventory levels.
The rating agency said the lower forecast was also compounded by concerns about the impact of the US-China trade war on demand for edible oils, a sizeable supply of vegetable oils. They concerns included negative developments in Europe on the sustainability of oil palm cultivation and the use of this tropical oil in biofuel production.
That said, we still anticipate a pick-up in demand from food-based consumption growth and for biodiesel production, amid stable output growth.
Local CPO production rose 10% on-year in Q1 2019, after having unexpectedly slowed down to 19.5 million tonnes in 2018 (-2% on-year), the latter due to weaker yields.
However, Indonesia registered a bumper crop of 47.4 mil tonnes last year (+13% on-year) and maintained a strong expansion of 22% in January-February 9019.
“We expect both Malaysia and Indonesia to post modest single-digit production growth this year,” it said.
RAM said CPO prices could also face downward pressure as the US Department of Agriculture estimates the supply of vegetable oils will expand 3% in 2018/2019.
On the demand front, Malaysia’s crude and processed palm oil exports rose 8% on-year in Q1 2019, after a flat performance in 2018. The improvement was underscored by more robust demand from India, China, Pakistan and the US.
Soft CPO prices and zero export duties since Sept 1, 2018 had likely triggered purchases of this tropical oil, as had India’s reduced import duties on CPO and refined palm oil products, effective Jan 1, 2019.
Meanwhile, Indonesian exports of palm products went up 3% in 2018, followed by another 15% in January-February of 2019.
“Demand for CPO is expected to remain supported by food-based consumption growth and demand from biodiesel producers,” RAM said.
As at end-March 2019, Malaysia’s inventory level had increased by 23% on-year to 2.9 million tonnes.
Conversely, Indonesia’s stockpile had diminished 29% on-year to 2.5 million tonnes as at end-February 2019 due to robust external and domestic demand.
Notably, Indonesia’s move to extend the use of the B20 biodiesel to non-subsidised vehicles since 1 September 2018 had substantially boosted its consumption of this commodity to 3.9 mil kilolitres last year (2017: 2.6 mil kilolitres).
Indonesia has allocated 6.2 million kilolitres of biodiesel to the B20 programme in 2019, which will support CPO demand.
Malaysia began implementing the B10 programme for the transportation sector in phases in December 2018; the B7 scheme will be executed for the industrial sector in July 2019.
The programmes in both countries could use up to 6.5 million tonnes of CPO (about 10% of their production last year).