The palm oil sector took solace from the lower output and higher demand that resulted in better CPO prices, benefiting plantation companies and smallholders. — AFP photo
KUALA LUMPUR: The trade spat between the US and China turned out to be a double-edged sword for the commodities in 2019 be it palm oil, rubber, tin or gold as it catalyses the ‘yin and yang’ in the sector.
While dampening global trade sentiment that affected commodities and financial markets across the globe, it has also created some windows of opportunities.
For instance, China shifted its interest from buying US soybean to Malaysian palm oil, the country’s second-largest commodity export.
Beijing took 1.89 million tonnes of palm oil between January and October compared with 1.42 million tonnes it imported in the same period a year ago.
The tides could shift differently in 2020 as the US President Donald Trump on Dec 13, 2019, halted new tariffs on Chinese goods and in return, China has promised to buy large quantities of US soybeans, poultry and other agricultural products.
Besides the external factors, the palm oil sector also took solace from the lower output and higher demand that resulted in better crude palm oil (CPO) prices, benefiting plantation companies and smallholders.
The trend is here to stay, at least until the first half of 2020 (1H20).
Public Investment Bank, for example, maintained an ‘overweight’ call on the plantation sector since October. From a four-year low of RM1,937 per tonne in July, CPO futures price rallied to a two-year high of RM2,850 per tonne on Dec 6, a massive gain of about 47 per cent.
The market generally foresees a stronger CPO price of between RM2,700 and RM2,800 per tonne in 1H20 as palm oil inventories in Malaysia would probably fall below the psychological level of two million tonnes from the current level.
The Malaysian Palm Oil Board (MPOB) announced that total palm oil stocks eased 4.08 per cent to 2.26 million tonnes in November 2019 from 2.35 million tonnes in the previous month.
It said the highest palm oil production and stocks for 2019 were in the months of September at 1.84 million tonnes and February (3.06 million tonnes), while the lowest was in June (1.51 million tonnes) and August (2.24 million tonnes).
Some analysts opined that the CPO futures active month has the strength to test RM3,000 per tonne or higher from now until 1H20.
“CPO and PK (palm kernel) prices have risen sharply in 4Q-to-date, by 34 per cent and 45 per cent, respectively. Couple with a lower fertilising application of Q4 due to the rainy season, we expect much stronger sector earnings in 4Q19,” said Maybank Investment Bank analyst Ong Chee Ting.
Despite the steady rise of CPO prices, its average price for this year dropped by 12.8 per cent to RM2,008.5 per tonne compared with last year’s RM2,303.5 per tonne as prices only started to pick in the third quarter.
A firmer ringgit against the US dollar also made palm oil more expensive for foreign buyers, therefore, capping the CPO prices from moving up further.
Both Indonesia and Malaysia, which account for almost 90 per cent of global palm oil production, would role out their new biodiesel mandate next year, thus reducing palm oil stocks even further.
Indonesia is set to roll out its B30 biodiesel mandate beginning Jan 1, while Malaysia will implement its B20 programme in the transport sector, which is expected to increase the local consumption to 1.3 million tonnes a year.
The shortage of foreign workers in the industry remains one of the industry’s major obstacles as they make up 70 per cent of the total workforce in oil palm plantations.
Plantation companies have sought the government’s approval to hire more foreign workers as harvesting of fresh fruit bunches are still being done manually in the absence of machines or equipment that is proven to be economically viable.
On a larger scale, as the government continues to push for sustainable palm oil, companies and smallholders will need to continuously improve their yields to boost production instead of through land expansion as land for oil palm cultivation is capped at 6.5 million hectares by 2023 from the current 5.8 million hectares.
Another notable issue was India’s move to increase import duty for Malaysia’s palm oil by 5.0 per cent to 50 per cent in the third quarter of 2019.
As a result, Malaysia’s palm oil export to India, the world’s largest palm oil consumer, declined by 29.2 per cent to 219,956 tonnes in October from 310,648 tonnes in September 2019.
Trade protectionism towards palm oil by western countries came in the form of anti-palm oil campaigns and regulations instituted to refrain imports of palm oil.
The higher imports and consumption of palm oil in both the edible and non-edible sectors (especially biofuel/biodiesel) in the importing countries are threatening their domestic vegetable oils, particularly rapeseed oil in the European Union (EU).
“This has caused serious concerns among edible oil producers and non-governmental organisations, thus initiating the anti-palm oil campaigns in the EU.
“The move by the European Parliament to adopt the Resolution on Palm Oil and Deforestation of Rainforest could be viewed as a protectionist measure towards the bloc’s vegetable oils industry, as well as biofuel industry in order to protect them from competition from imported vegetable oils, especially palm oil,” MPOB director-general Dr Ahmad Parveez Ghulam Kadir said.
Hence, the Malaysian Sustainable Palm Oil Certification (MSPO) scheme, which will be mandated in January 2020, is a step towards creating a globally accepted sustainability system and branding Malaysian palm oil to become a global consumer choice.
This, he said opens wider market access to Malaysian sustainable palm oil. The government aims to achieve 70 per cent MSPO certification for palm oil planted areas by February 2020 and 80 per cent in mid-2020 from 60 per cent as of October 2019. — Bernama