CPO price average forecast reduced to RM2,175 per MT – Analysts

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KUCHING: Analysts are expecting 2015 and 2016 average crude palm oil (CPO) price of RM2,175 and RM2,100 respectively, as global soybean oil inventory is expected to increase.

“We have reduced our 2015 CPO price by nine per cent to RM2,175 per metric tonne (MT) due to higher global soybean oil inventory, rising US Dollar Index and low Brent crude oil prices currently,” said the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) yesterday.

“Additionally, we have also introduced 2016 average CPO price of RM2,100 per MT. We reckon that consensus CPO price forecast for 2015 at average RM2,300 per MT is still too bullish as first half 2015 (1H15) average is only at RM2,228 per MT.

“Historically, CPO supply in the second half of the year is higher than first half. This should limit CPO price’s upside.”

According to the United States Department of Agriculture (USDA), global soybean oil inventory is expected to increase to 3.41 million MT in 2015. Looking ahead, this is expected to increase further to 3.60 million MT in 2015/2016.

Key reasons for this include additional soybean supply from three global producers in the world namely US, Brazil and Argentina.

As soybean oil and CPO are commonly used as substitute to each other for food and industry use, MIDF Research believes that increasing inventory for soybean oil means limited upside for CPO price.

Historically, US Dollar Index has strong negative correlation with CPO price.

“In the past 10 years, the correlation between these two is at negative 0.71. This trend could be caused by the shift of liquidity between cash and commodity by global fund managers.

“For example, when US Dollar provides low interest, global fund managers may believe that it is better to keep less cash and invest the money in commodity and this caused the lower US Dollar Index and higher CPO price.

“The vice versa applies. In the current global economy trend in which we think that US Dollar Index is unlikely to decline in the next 12 months, it is hard for CPO price to surge significantly,” said the research house.

Estimates shows that discretionary demand for biodiesel is likely to have stopped completely. This is due to the negative margin expected, assuming CPO price of RM2200 per MT and Brent crude oil price of US$70 per barrel.

“Our calculation shows that biodiesel production is only economically feasible if Brent crude oil price is to increase above US$82 per barrel and CPO stays at RM2,200 per MT or CPO price to decline below RM1,900 per
MT.

“Hence, we think that the demand for biodiesel will only be limited to countries in which mandatory admixture is imposed. Overall, this should lead to weak demand for CPO from the biodiesel segment.”

On another note, the research house is aware of the threat that El Nino may cause significant production decline for CPO and hence possibly trigger CPO price to surge. However, it wishes to highlight that the magnitude of production decline will still depend on the severity of the El Nino.

“Based on the latest information by Australia Bureau of Meteorology, it was mentioned that ‘It is not possible at this stage to determine how strong this El Niño will be.

“In our model, we have assumed weak El Nino as we have assumed Malaysia palm oil inventory to decline to 1.68 million MT by end-2015.

“Despite declining inventory, the three other factors are keeping CPO price upside limited.”