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Photographer: Goh Seng Chong/Bloomberg

Workers inspect the quality of harvested oil palm fruit outside a processing mill in Batu Pahat, Johor, Malaysia. Palm oil, used in food and biofuels slumped to a five-year low this month as output from Indonesia and Malaysia outpaced demand amid a glut in global cooking oil supplies, including soybean oil.

Palm Oil Seen Dropping as Mistry Has Buy Call on Planters

By Swansy Afonso

September 16, 2014 5:23 AM EDT

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Palm oil’s slump to a five-year low offers investors an opportunity to buy plantation stocks, according to Dorab Mistry, director at Godrej International Ltd., who says producers are still making money.

“I am often asked these days if palm plantation and processing company equities should be bought: my answer is a resounding yes,” Mistry said yesterday, without identifying stocks. “You invest in plantations when palm oil prices are low. I prefer processing companies which manufacture speciality fats, oleochemicals, biodiesel and own consumer brands. Upstream companies will benefit when the price cycle turns.”

Mistry, who’s traded palm oil for more than three decades, joins Standard Chartered Plc in recommending investors buy plantation stocks to profit from a rebound in prices. The oil fell to a five-year low on Sept. 2 as output from Indonesia and Malaysia, the biggest producers, topped demand amid a glut in global cooking oil supplies, including soybean oil. Global palm consumption increased 81 percent in the decade to last year as rising incomes lifted demand, U.S. government data show.

“Long-term demand for palm oil is very supportive of the sector, and that supports the case for recovery in CPO prices,” said Alex Fergusson, a fund manager at Singapore-based Woodside Holdings Investment Management Pte, referring to a period of five to 10 years. Growth in per-capita gross domestic product and populations in emerging markets are the drivers for demand, said Fergusson, who invests in palm plantations.

Price Outlook

Prices will drop in the next few weeks toward the cost at which growers in Asia produce the world’s most-used cooking oil, said Mistry, according to remarks at a conference in Shanghai. Futures will drop to about 1,900 ringgit ($588) a metric ton, he said. That’s 9.6 percent below yesterday’s close on the Bursa Malaysia Derivatives and would be the lowest price since March 2009. The exchange is closed today for a public holiday.

“It is almost impossible to forecast a bottom at this stage of theproduction cycle,” Mistry said. “However, producers are still very much in the money and I do not foresee prices going below cost of production.”

Mistry’s address echoed comments that he made in e-mailed remarks to Bloomberg News last month, when he said the “world is awash with vegetable oils,” and forecast that palm oil would drop toward the cost of output.

Declining Stocks

Palm oil’s drop hurt shares in growers. In Singapore, Golden-Agri Resources Ltd. (GGR) lost 8.3 percent this year to 50 Singapore cents, while Wilmar International Ltd. retreated 8.8 percent to S$3.12. In Malaysia, Kuala Lumpur Kepong Bhd. (KLK) fell 14 percent in 2014.

“We have long argued that the way to make money in the palm sector is to buy growth operators when prices are low and sentiment is weak,” Standard Chartered analysts Adrian Foulger and Denis Chai said in a report dated Sept. 3. The bank named PT BW Plantation as its top pick, while rating it “outperform” along with Golden-Agri and Indofood Agri Resources Ltd.

Palm oil prices are expected to strengthen in the final quarter on lower production, and there’s a better outlook for 2015 as biodiesel demand may increase, RHB Investment Bank Bhd. said in a Sept. 10 report. The bank said it remains overweight on plantation stocks in Indonesia and Singapore.

Palm dropped 21 percent this year to 2,101 ringgit a ton yesterday. Prices fell to a five-year low of 1,914 ringgit on Sept. 2, then rebounded after Malaysia scrapped an export levy for this month and October. Palm’sdiscount to soybean oil was $90.84 a ton today from last year’s average of about $244.

Higher Production

Full-year output in Malaysia, the second-largest grower, will probably be more than the 19.7 million tons to 19.9 million tons initially estimated, Mistry said. In the first eight months, supply was 12.76 million tons, 991,000 tons more than a year ago, while exports dropped 6.6 percent to 10.99 million tons, he said. Indonesian production is also ahead of expectations, he said.

Stockpiles will continue to rise and peak in December, Mistry said. Reserves in Malaysia jumped 22 percent to 2.05 million tons in August from July, the biggest percentage gain since October 2009, Malaysian Palm Oil Board data show.

“In the fourth quarter of 2008, we were facing a similar situation with regard to supply, demand and price,” Mistry said. “At that time, palm rapidly made itself competitive and exported its way out of a crisis as Malaysian stocks peaked at 2.238 million in December 2008.”

Imports of vegetable oils by India, the biggest palm oil buyer, surged to 1.34 million tons in August and may exceed 1 million tons this month, Mistry said. Many vessels carrying palm oil to China were diverted to India in August, and berths there are now congested, he said. Chinese imports will probably remain thin for at least the next three months, he said.

To contact the reporter on this story: Swansy Afonso in Mumbai atsafonso2@bloomberg.net

Serian Oil Palm Mill

Serian Oil Palm Mill

Mixed blessings from CPO duty exemption

By Hanim Adnan & Zunaira. The Star

PETALING JAYA: The newly imposed export duty exemption on crude palm oil (CPO) for September and October will have a positive impact on the local upstream plantation players, but will be negative for palm oil refiners in the short term.

CIMB Research, in its latest report, said the move to cut export tax in September to zero would allow local CPO exporters to save about RM106 per tonne in export tax value [RM2,348.8 per tonne (the CPO reference price) x 4.5% export tax].

The CPO export duty for September had been earlier gazetted at 4.5%.

CIMB Research said the export tax exemption would help boost CPO exports from Malaysia in the near term, as “it would be more competitive against Indonesian CPO, which is subject to a 9% CPO export tax for September”.

On the other hand, the impact would be negative for Malaysian refiners, as “they would become less competitive against the Indonesian refiners for the rest of September”, said the research unit.

Following this, the export tax differential between refined, bleached and deodorised palm oil (refined products) and CPO will be zero in Malaysia against 9% for the Indonesian refiners.

“However, the CPO tax advantage against Indonesia may not last as we head into October, as there is a likelihood that Indonesia would also adjust its CPO export tax down to zero if CPO prices stay at current levels and average below US$750 per tonne,” added CIMB Research.

“Overall, we view this measure as positive in the short term, as it would encourage CPO exports from Malaysia, which have been weak over the past few months,” said the research unit.

However, this may not be able to significantly lift CPO prices, which have fallen to a five-year low due to concerns over rising oilseeds and edible oil supply in the global market due to favourable weather conditions.

“Pure upstream palm oil players in Malaysia may benefit the most from this measure in the near term, while planters with significant downstream operations in Malaysia may be dented by this move in the near term,” said CIMB Research.

When contacted by StarBiz, the Palm Oil Refiners Association of Malaysia (Poram) said the association had not been consulted on the latest CPO export duty exemption.

“Poram has no further comments, as the CPO export duty structure (introduced in January 2013) had already been implemented by the Customs Department.

“A majority of our members are supportive of the CPO export duty structure and would like the Government to continue implementing them. Our position has not changed.”

Industry expert M.R. Chandran pointed out that the two-month tax exemption for CPO export would provide a short-term relief for local exporters.

“Palm oil exporters are getting a temporary breather that will help to stem the rising palm oil stocks and mitigate further drops in the CPO prices.”

Chandran said the Government’s move would encourage additional exports of CPO, amounting to 300,000 tonnes per month for the next two months.

“This will lower the current inventory and help to push the CPO prices upward.

“Coupled with this, the Government has also announced that Malaysia would boost its bio-diesel blending programme to 7% from 5% effective this December,” he added.

On the other hand, Chandran expects Indonesia’s counter-reaction to also have an impact on the local palm oil industry.

UOBKayHian, in its latest report, described the CPO export duty exemption as positive and that the supportive measure from the Government came earlier than expected.

“The move to prevent further declines in CPO prices should see CPO recovering to above RM2,000 per tonne,” the research unit said, adding that “however, it is unlikely to bring the CPO price on par with the first-quarter 2014 range of RM2,500 to RM2,800 per tonne due to concerns of large supplies of oilseeds coming into the market from the United States.”

Oil Palm Price will increase in 2015 & 2016

KUCHING: Analysts expect stronger recovery of crude palm oil (CPO) prices in 2015 and 2016 despite weak CPO futures prices reported since June at below RM2,000 per metric tonne (MT).

The research arm of Affin Investment Bank Bhd (Affin Research) in a recent note said the three-month CPO futures dipped below RM2,000 per MT after a series of bad news such as projected record-high US soybean production, weak palm oil exports growth, slow progress in the biodiesel mandate implementation in Malaysia and Indonesia, reduced chances of a strong El Nino event, and recently, tight credit faced by Chinese importers.

Nevertheless, the research team opined that there is potential for price recovery, as prices below RM2,000 per MT are likely to lead to cutbacks in plantation upkeep as well as an increase in replanting activities and a slowdown in new plantings.

“The normal palm oil premium to crude oil has also turned into a discount.

“Based on the still-tight global supply of major vegetable oils in 2014 to 2015 and further progress in biodiesel adoption in Malaysia and Indonesia, we expect firmer CPO prices in 2015 to 2016,” it said.

Affin Research also believes the long-term outlook for the plantation sector remains bright as key drivers remain in place.

Nevertheless, given the weak CPO prices since June, Affin Research cut its CPO average selling price (ASP) assumption to RM2,600 per MT in 2015 and RM2,700 per MT in 2016 to 2017.

“Factoring in a CPO ASP of RM2,100 per MT to RM2,300 per MT in the fourth quarter of 2014 (4Q14), we cut our 2014 forecast from RM2,700 per MT to RM2,400 per MT,” it added.

Meanwhile, in a separate note, AmResearch Sdn Bhd (AmResearch) said it is positive about the recent scrapping of CPO export tax by the Malaysian government.

“This would allow some of the upstream producers to export their CPO if the storage tanks at the refineries are full.

“We reckon that these upstream producers would probably use brokers as intermediaries for their exports.

“Also, refiners may export more palm oil in crude form instead of refined, to take advantage of the zero tax,” it explained.

Of note, the government of Malaysia said it would scrap the export tax on CPO in September and October to boost shipments by 600,000 tonnes, which should ease palm oil inventory to 1.6 million tonnes by year-end.

Earlier, AmResearch noted, the government had set a CPO export tax of 4.5 per cent for September. Based on the export tax schedule, there is no tax if CPO prices are below RM2,250 per tonne.

Meanwhile, on the roll-out of B7 biodiesel, the Plantations Industries and Commodity Ministry is preparing a paper on B7 to be presented to the Cabinet.

It added, the ministry plans to implement B7 from December 2014 onwards and if B7 is implemented nationwide, about 700,000 tonnes of palm oil will be used.

AmResearch remained generally neutral on the roll-out of B7 as a step up from B5 to B7 would see an incremental absorption of palm oil of only 200,000 tonnes per year.

Also, it said, it is uncertain if car makers would have issues with warranty.

On the roll-out of B5 biodiesal, AmResearch said B5 has been implemented fully in Peninsular Malaysia but it has been delayed in Sabah and Sarawak due to pricing and infrastructure issues.

Looking ahead, the research team noted, consensus forecast for Malaysia’s palm oil inventory is at 1.95 million tonnes for August 2014.

It added, India would likely be the main market for palm oil in crude form as currently, India has an import duty of 2.5 per cent on crude palm oil and 10 per cent on refined palm oil.

AmResearch further pointed out that currently, most Indian buyers prefer to buy refined palm oil instead of crude due to the small tax differential between CPO and refined palm oil.