PETALING JAYA: Crude palm oil (CPO) prices may have a run-up ahead of fundamentals on supply crunch fears due to slower output growth and higher biodiesel mandates.
CGS-CIMB Research said this was evidenced by the soybean oil premium, which has narrowed significantly against the CPO to only US$4 per tonne as compared to the historical average of US$106 per tonne.
“We are of the view that the CPO price could take a breather and trade in the range of RM2,600 to RM2,900 per tonne in December, ” it said in a research report.
The three-month CPO futures was trading above RM2,900 yesterday. Malaysia’s palm oil stockpile fell to its three-month low as at end-November, down 4% month-on-month (m-o-m) and 25% year-on-year (y-o-y) to 2.26 million tonnes.
It was also the first m-o-m decline in the November stockpile since 2011. This was 2% and 5% above the Reuters and Bloomberg forecasts, respectively, at 2.22 million tonnes and 2.15 million tonnes. CGS-CIMB had projected it to be at 2.16 million tonnes.
The research house said the higher-than-expected stockpile was mainly due to lower-than-expected exports. It also expects palm oil stocks to fall 6% m-o-m to 2.28 million tonnes at the end of this month, as consumption and exports are projected to trump production and imports.
Meanwhile, CPO production also fell 14% m-o-m and 17% y-o-y to 1.54 million tonnes in November, the lowest monthly palm oil output in November since 2010, possibly due to lower fertilisers applied by farmers a year ago and dry weather experienced in parts of the region.
CGS-CIMB has revised down its 2019 production forecast to 19.9 million tonnes from 20.3 million tonnes.
“Palm oil exports fell 15% m-o-m but grew 2% y-o-y to 1.4 million tonnes, with weak demand from India which was partially offset by stronger demand from China and Pakistan, ” it said, adding that the weaker demand from India could partially be due to the sudden sharp rise in the CPO price.
It expects palm oil output and exports to fall by 8% and 5% m-o-m, respectively, this month.
Kenanga Research has also forecast weaker exports this month, saying that palm oil buyers typically switch to soybean oil during winter from December to February, given palm oil’s high solidification point of 35°C as compared to soybean oil at -18°C to -8°C.
It also expects demand from India to remain low, as the country has already built up its oils and fats inventory.
“However, this should be slightly cushioned by China’s demand, given the country’s low inventory level as of October 2019.
“Overall, we expect exports to fall 9.8% to 1.34 million tonnes in December, ” said Kenanga, adding that it believed CPO prices should retrace between RM2,400 and RM2,600 in the near term for the remaining fourth quarter of 2019.
Both CGS-CIMB and Kenanga have maintained their “neutral” rating on the plantation sector.
MIDF Research, which has upgraded the sector to “neutral” from “negative”, said the outlook for plantations is expected to improve considerably in 2020, supported by expectancy that the CPO price would remain elevated.
It expects incremental growth in CPO production to be meagre while the biodiesel mandate should push consumption higher.
“These would potentially lead to a continual declining trend of inventory levels and diminishing inventory levels.
“The reduction of export duties on Malaysian palm oil from January 2020 onwards will further lend support to export demand.
“However, the potential restriction of palm oil imports by the Indian government to help its local farmers might result in tapering demand from the region and stifle export demand growth, ” it said.
OCBC Bank economist Howie Lee said the market typically required six months to correct the supply-demand imbalance and this suggests prices are expected to remain elevated through the first quarter next year, before correcting from the second quarter onwards.
“The correction might prove especially deep if China agrees to substantially increase its purchases of US soybean, which may initially lift palm oil prices but then ultimately deflate when soybean oil returns to normal levels in Chinese inventories, ” he said.
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