MARKET DEVELOPMENT
Analysts: Limited Downside to CPO Prices Following July Figures
Analysts: Limited Downside to CPO Prices Following July Figures
13/08/2014 (Borneo Post) - Despite the Ramadan holidays when a large number of migrant workers returned to Indonesia, Malaysian Palm Oil Board’s (MPOB) July inventory came in above market expectations at 1.68 million metric tonnes on the back of seasonally higher production in July, lower exports and weaker domestic demand.
This follows as consumers bought ahead of the Ramadan festivity in June this year.
Notably, crude palm oil (CPO) production in July increased by 6.1 per cent month on month (m-o-m) to 1.67 million metric tonnes (MT).
Production increased by eight per cent m-o-m in Peninsular Malaysia and 17.8 per cent in Sarawak but declined by 3.3 per cent in Sabah.
Maybank Investment Bank Bhd (Maybank Research) said the initial export estimates for the first 10 days of August by independent cargo surveyors Intertek and SGS are worrying with weak export volume at 347,000 metric tonnes and 356,000 metric tonnes respectively.
However, these data may have been skewed by the week-long Hary Raya festivities. A pick up in exports during the remainder of August is crucial to sustain CPO prices at this level.
“In the immediate term, we view CPO prices to continue trading sideways, capped by weak soybean and soyoil prices due to concerns over ample global oilseeds supply.
“The US has planted record soybean area in 2014 and the market is anticipating a bumper harvest given the relatively favourable weather thus far.
“It is important for Malaysian stockpiles to stay below two million metric tonnes for the rest of 2014, as this will help lift current CPO prices back to above the RM2,600 per tonne levels by the final quarter of the year.”
Adding to the poor sentiment in the futures market, which resulted in futures trading at a discount to locally delivered prices, is the announcement that the implementation of the B5 mandate in East Malaysia has been delayed from July to December 2014.
On a more optimistic note, Affin Investment Bank Bhd (Affin Research) observed that chances of El Nino decreased to about 65 per cent.
“The latest US NOAA advisory stated that the consensus of forecasters expects El Niño to emerge during August-October and to peak at weak strength during the late fall and early winter. The chance of El Nino has decreased to about 65 per cent during the Northern Hemisphere fall and early winter.”
Nevertheless, RHB Research Alvin Tai and Hoe Lee Leng from RHB Research Institute Sdn Bhd (RHB Research) believed all these will pave the way for CPO to see a stronger year in 2015.
“We believe 2015 could still be a better year for palm oil prices. Both Indonesia and Malaysia’s biodiesel infrastructure would be more established then, resulting in an increase in usage.
“Industry sources believe that biodiesel capacity in Indonesia may also increase sharply over the next 12 months. Moreover, despite the late arrival of El Nino, rainfall has been poor this year – which could lead to 2015 being another year of sub-par yields for palm oil.”
Maybank Research believed CPO prices will ebb supported by lower year on year output growth in the second half of 2014 after good FFB harvest in the first half.
“Below average rainfall year to date in Peninsular Malaysia and Sarawak may also be supportive of a relatively muted FFB output in coming months.
“Overall, we think there is limited downside to current CPO price, expecting stronger demand from the energy sector as European diesel proces are now above CPO prices, boosting palm biodiesel demand.”
This follows as consumers bought ahead of the Ramadan festivity in June this year.
Notably, crude palm oil (CPO) production in July increased by 6.1 per cent month on month (m-o-m) to 1.67 million metric tonnes (MT).
Production increased by eight per cent m-o-m in Peninsular Malaysia and 17.8 per cent in Sarawak but declined by 3.3 per cent in Sabah.
Maybank Investment Bank Bhd (Maybank Research) said the initial export estimates for the first 10 days of August by independent cargo surveyors Intertek and SGS are worrying with weak export volume at 347,000 metric tonnes and 356,000 metric tonnes respectively.
However, these data may have been skewed by the week-long Hary Raya festivities. A pick up in exports during the remainder of August is crucial to sustain CPO prices at this level.
“In the immediate term, we view CPO prices to continue trading sideways, capped by weak soybean and soyoil prices due to concerns over ample global oilseeds supply.
“The US has planted record soybean area in 2014 and the market is anticipating a bumper harvest given the relatively favourable weather thus far.
“It is important for Malaysian stockpiles to stay below two million metric tonnes for the rest of 2014, as this will help lift current CPO prices back to above the RM2,600 per tonne levels by the final quarter of the year.”
Adding to the poor sentiment in the futures market, which resulted in futures trading at a discount to locally delivered prices, is the announcement that the implementation of the B5 mandate in East Malaysia has been delayed from July to December 2014.
On a more optimistic note, Affin Investment Bank Bhd (Affin Research) observed that chances of El Nino decreased to about 65 per cent.
“The latest US NOAA advisory stated that the consensus of forecasters expects El Niño to emerge during August-October and to peak at weak strength during the late fall and early winter. The chance of El Nino has decreased to about 65 per cent during the Northern Hemisphere fall and early winter.”
Nevertheless, RHB Research Alvin Tai and Hoe Lee Leng from RHB Research Institute Sdn Bhd (RHB Research) believed all these will pave the way for CPO to see a stronger year in 2015.
“We believe 2015 could still be a better year for palm oil prices. Both Indonesia and Malaysia’s biodiesel infrastructure would be more established then, resulting in an increase in usage.
“Industry sources believe that biodiesel capacity in Indonesia may also increase sharply over the next 12 months. Moreover, despite the late arrival of El Nino, rainfall has been poor this year – which could lead to 2015 being another year of sub-par yields for palm oil.”
Maybank Research believed CPO prices will ebb supported by lower year on year output growth in the second half of 2014 after good FFB harvest in the first half.
“Below average rainfall year to date in Peninsular Malaysia and Sarawak may also be supportive of a relatively muted FFB output in coming months.
“Overall, we think there is limited downside to current CPO price, expecting stronger demand from the energy sector as European diesel proces are now above CPO prices, boosting palm biodiesel demand.”