KUCHING: A lack of momentous price catalysts either given a likely seasonal production pick-up in the second half of 2018 (2H18) limits crude palm oil (CPO) price improvements, leading analysts to anticipate minor improvements in CPO prices in the near term.
Kenanga Investment Bank Bhd (Kenanga Research) believed the price of CPO will see its downside limited to RM2,000 per metric tonne (MT) (based on small-holders cost of production) and upside capped at RM2,530 per MT (based on US$60 per MT discount to competing soybean oil).
Also, MIDF Amanah Investment Bank Bhd (MIDF Research) said with the latest inventory data coming in higher than market expectation, the news would likely be slightly negative on CPO price.
“The downside is limited in our view due to strong Brent crude oil price at above USD78 per barrel currently,” it said in another note. “Additionally, export volume has recovered in the first 10 days of September with cargo surveyor data showing significant improvement of 63 per cent against first 10 days in August.
This comes as Malaysia’s CPO export was lower by 49 per cent month-on-month (m-o-m) to 1.10 million tonnes in August 2018.
“We believe that the weaker demand is caused by the cooler weather in August as summer season is ending,” MIDF Research said, adding that palm oil usage tend to decline during cool weather.
Kenanga Research, meanwhile believed the decline in exports to the European Union was because buyers in the region had been hoarding inventory over the past few months amid low CPO prices – as elucidated by a 4.6 per cent increase for the first seven months of 2018 (7M18) exports to the EU.
“Positively, exports to India recovered slightly to 139,000 MT after it raised import taxes on other vegetable oils in mid-June, which has made palm oil more competitive in the market,” it added in a separate note.
“Exports to China remained flat from the previous month after two consecutive months of sequential decline.”
Kenanga Research also believed exports would recover in September 2018 as the EU resumes imports of palm oil for biodiesel use.
“Data from Bloomberg show that the CPO-to-gasoil discount is currently at circa US$152 per MT, making biodiesel blending profitable — cost of production typically ranges from US$100 to US$150 per MT.
“This should incentivise discretionary biodiesel blending, thus supporting exports volume to the EU.
“Additionally, exports to China are expected to pick up ahead of the winter season in November to March. Meanwhile, exports to India could remain flat as rupee continues to weaken against major currencies, which pressures the country to keep imports in check.”
Overall, we forecast September exports volume to grow moderately at 11 per cent m-o-m to 1.22 million MT.
“We anticipate supply growth of 1.84 million MT to exceed demand improvement of 1.53 million MT, leading to higher ending stocks of 2.80 million MT in September 2018. We believe near-term CPO prices are supported by the current steep CPO-gas oil discount and India’s move to raise import taxes on other vegetable oils as noted.”