KUCHING: Analysts at RAM Ratings Services Bhd (RAM Ratings) forecast crude palm oil (CPO) prices to average between RM2,200 and RM2,400 per metric tonne (MT) in 2015 as RHB Research Institute Sdn Bhd (RHB Research) remains optimistic on Indonesia’s possible hike in biodiesel subsidies.
In a statement yesterday, RAM Ratings expects CPO prices to average between RM2,200 and RM2,400 per MT this year against a backdrop of ample edible oil supply and subdued consumption growth.
The weak ringgit is expected to provide a cushion against an otherwise sharper fall from 2014’s average price of RM2,408 per MT, it said.
“As a growing mature hectarage in key palm oil-producing countries underpins CPO production growth in 2015, strong soybean production in the US and expectations of a bumper harvest in South America are anticipated to keep the edible oil market well supplied,’ it explained.
“The heightened competition between edible oils could keep CPO prices in check while demand growth is expected to be lackluster. Meanwhile, weak crude oil prices reduce the economic viability of CPO use in biodiesel, notwithstanding demand from government-driven mandates.
“While we note of the increased attractiveness of CPO due to the weaker ringgit, the build-up of inventory in the medium term would be bearish on the commodity’s prices. CPO prices may be supported by the lower production in the first half of the year and potentially weakening in the second half when production seasonally peaks.”
Meanwhile, a possible spike in Indonesia’s biodiesel subsidies would provide a catalyst for palm oil prices, RHB Research said in a note to investors.
The parliament’s energy commission and the government approved an increase to 4,000 rupiah (US$0.32) a liter from 1,500 rupiah. The move needs to be passed by the budget committee in parliament, the directorate general for oil and gas at the Energy & Mineral Resources Ministry said Thursday.
RHB Research said this translates into a positive margin of US$40 per barrel for biodiesel producers.
“This proposal still has to get parliamentary backing, but should it go through, would help provide a boost to CPO demand, assuming the B10 mandate is fully implemented in Indonesia.
“This law, if passed, would be a positive catalyst for palm oil prices,” observed RHB Research’s analyst Alvin Tai. “A US$0.40 per litre subsidy translates into US$63.60 per barrel. Currently the biodiesel margins (with no subsidies) are at minus US$23 per barrel.
“Therefore, with this subsidy, biodiesel producers would be able to make a positive margin of US$40 per barrel, excluding transport costs.”
Prior to the crude oil price drop, logistical and infrastructure problems hindered the implementation of Indonesia’s B10 mandate.
“Assuming these issues are resolved and Government is able to finance the additional subsidies, biodiesel producers in Indonesia would require up to three million tonnes of CPO to meet the B10 mandate in 2015.
“In 2014, Indonesia’s biodiesel demand was about 1.7 million tonnes. We highlight, however, the risk of crude oil prices dropping further, which could dampen margins and the feasibility of this flat subsidy rate. It would probably be better, in our opinion, if Indonesia adopts a more robust subsidy method, perhaps like Malaysia’s cost-plus method.
“Although the near-term upside for palm oil prices appear to be on the cards, our average price assumption of RM2,500 per tonne could be slightly optimistic and may be subject to downward revision,” the analyst added.
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