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.
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