REMAINING BULLISH: Although the global economy has suffered a slowdown in 1H11, analysts remain optimistic as the August numbers for CPO exports are 39 per cent higher as compared with the previous corresponding period.
KUCHING: Mounting global economic uncertainties have put pressure on crude palm oil (CPO) demand as slower gross domestic product (GDP) in major palm oil consuming countries threaten the worldwide consumption of CPO.
An analyst from the research arm of Kenanga Investment Bank Bhd (Kenanga Research) voiced skepticism over the slower GDP growth experienced in the first half of this year (1H11) that would affect the exports volume of the nation’s CPO.
The sluggish economic growth, especially in Europe had sparked concerns as CPO prices have strong correlation of 80 per cent with the continent’s GDP for the past 10 years. A hold back over the global economic growth would inevitably impact emerging economic, which would consequently soften CPO demand for biofuels and edible oil consumption.
The combined effect would negatively influence Malaysia’s CPO exports, which had witnessed a drop of three per cent month-on-month (m-o-m) to register at 1.69 million metric tonnes (mt) in August this year. This according to the analyst was the first drop experienced in six months.
Despite negative numbers recorded in the statistics, OSK Research Sdn Bhd’s (OSK Research) analyst was still optimistic on the CPO performance for the year.
“Although CPO exports shrank by 2.7 per cent m-o-m in August, it is still 39 per cent higher on a year-on-year basis as compared with the previous corresponding period.”
“We have seen a peak in CPO exports in July where it hit a historical high of 1.74 million mt, hence the slowdown in exports in August is most probably attributed to the higher purchases in the previous month and drop in demand from China and Bangladesh,” he told The Borneo Post.
On the external front, although the analyst was cautious of the risk of set-back in demand, the August number recorded the second-highest monthly exports for Malaysia historically.
“This is evident in the 2008 financial crisis where we saw bullish exports numbers and it went up again in 2009 and 2010. Apart from that, on the demand side, CPO will most likely have an inelastic impact from macro factors considering that it is a feedstock to edible oil,” he underscored.
Mahbob Abdullah, a veteran specialist in the plantation sector echoed the analyst’s view as he believed that as the world population increased, palm oil would inevitably be enjoying stronger demand.
As doubts over the demand over CPO exports loomed ahead, further subject of interest included the CPO prices which were treading on shaky grounds as better soybean production outlook might cause soybean oil prices to weaken.
This would be negative for CPO prices as it was a common substitute for soybean oil. Historically, CPO prices tracked soybean oil prices closely with correlation of 91 per cent over the past five years.
To recap, on September 12, the US Department of Agriculture had increased its US soybean production estimate by one per cent or 29 million bushels for 2011/12 to 3,085 million bushels due to higher yields.
Accordingly, soybean ending stocks estimate were increased by six per cent or 10 million bushels to 165 million bushels as supplies growth exceeded exports growth.
However, analysts oat Kenanga Research maintained its calendar year 2012 (CY12) average CPO prices of RM3,000 in its research note, but had stepped up its anticipation of the CY11 CPO price by three per cent to RM3,300.
Above-average discount of US$225 against soybean oil provided support to CPO prices in August this year, keeping it flat at RM3,115. The unexpected dry weather in US had kept soybean oil prices high during that period.
“As we have adjusted our model to include the effect of higher soybean oil prices, CPO prices should be supported above RM3,000 level in the fourth quarter of this year (4Q11), hence our higher average CPO prices of RM3,300 for CY11.
“However, the discount may still widen if CPO demand shrinks substantially, not to mention we expect CY12 CPO prices to downtrend based on our maintained CY12 assumptions,” opined the research house.