Commodities sector faces strong headwinds
The Star Online (28/12/2018) - KUALA LUMPUR: The local commodities sector, namely crude palm oil (CPO), rubber, tin, and gold, continues to face strong headwinds in 2018 as the global economy struggles to find its footing.
For instance, CPO, which is the country’s second biggest contributor to the economy, saw a price decline of about 20% year-to-date due to weaker fundamentals, especially so as its inventory level was nearing three million tonnes as reported by the Malaysian Palm Oil Board (MPOB).
Traditionally, the edible oil’s lifecycle will start the year with a lower output but higher exports due to the festive seasons, namely the Chinese Lunar New Year and Hari Raya Aidilfitri, as consuming countries stock up palm oil for cooking and food products.
“The production generally tend to peak later in the year moving towards the fourth quarter, in line with seasonality pattern,” said Phillip Futures Sdn Bhd’s derivative dealer David Ng.
However, other edible oils, the likes of soybean, rapeseed and sunflower, are also experiencing similar patterns, thus resulting in higher inventory for Malaysian CPO amid lower demand, hence, pressuring the price to dip to below RM2,000 per tonne in November, the lowest in five years.
Concurring with this view, plantation veteran M. R. Chandran said the commodities markets worldwide were going through a recession in 2018.
“China and India, the world’s biggest consumers of palm oil, had slowed down their purchases as their own crop production have been much better,” he said.
Meanwhile, the MPOB noted that the three million tonne-mark in November was the highest stockpile level recorded in nearly two decades, and it was expected to increase further.
During the month, the CPO price also suffered its biggest fall in more than 21 months after Indonesia announced measures to increase shipments.
The republic, which is the world’s biggest CPO producer, had temporarily erased its export levy to zero from a range of US$20 to US$50 per tonne, to boost its palm oil exports.
An independent inspection company, AmSpec Agri Malaysia, said the exports of local palm oil products for the first 15 days of December fell 4.6% to 524,083 tonnes from 549,488 tonnes shipped during the same period in November.
As of Dec 13, CPO futures prices ranged from RM1,700 to RM2,600 per tonne in 2018 compared with RM2,400 to RM2,900 per tonne recorded in the same period in 2017.
The CPO price is expected to average at RM2,300 per tonne in 2019 versus RM2,100 this year, owing to better fundamentals due to higher demand amidst lower output.
“At RM2,300 per tonne, buying support for CPO next year will come from Indonesia, home to 264 million people.
“This is especially so with the government’s mandate to utilise CPO for B20 in the automotive industry, on top of using the commodity for food products. The larger consumption calls for higher demand,” a dealer said.
B20 is a blend of 20% biodiesel and 80% petroleum diesel.
The escalating trade war between the United States and China has dampened the manufacturing sector’s performance, resulting in lower demand for the Standard Malaysian Rubber (SMR) grades, thus weakening the price.
This has an impact on the wellbeing of the smallholders who account for 90% of the rubber production in the country.
Malaysia Rubber Board director-general Datuk Dr Zairossani Mohd Nor was reported as saying that Malaysia could only produce around 750,000 tonnes, which was below its capacity level as there are 41 factories processing rubber with the capacity of producing about 1.5 million tonnes per year.
In addressing this issue, the government has agreed to raise the activation price under the Rubber Production Incentive (RPI) scheme to compensate tappers’ losses during the decline in global rubber price.
“The RPI was created to allow rubber tappers to earn at least a standard amount per kg and the government will pay the amount lost when the rubber price declines.
“Since its introduction in September 2015, it has been raised twice from the initial price of RM1.75 to RM2 and RM2.20 per kg,” he said.
From RM2.20 per kg, Zairossani said the RPI activation price will be raised to RM2.50 per kg starting January 2019.
According to the Malaysian Rubber Exchange, the SMR 20, which is the country’s rubber pricing benchmark, traded between a high of RM6.03 per kg and a low of RM5.11 per kg for the January-October 2018 period.
As for tin, the metal price on the Kuala Lumpur Tin Market (KLTM) has been on a downtrend, declining since January onwards.
Tin price went down to US$18,450 per tonne in November from its high of US$22,105 per tonne earlier in March, in tracking the metal price on the London Metal Exchange.
A Kuala Lumpur-based trader said there was a recovery in the tin price when the Indonesian Trade Ministry reported a decline in the republic’s tin exports.
“The news boosted the local tin price and it rose to above US$19,000 per tonne in December,” he said, adding that throughout the year, the market had been impacted by escalating trade war between the world’s two biggest and rival economies the US and China.
On the gold futures market, the precious metal currently trades at RM161.02 a gramme on Bursa Malaysia Derivatives.
The market did not perform well this year, in line with the weaker price on the benchmark New York Commodity Exchange's (Comex) gold futures.
Phillip Futures Sdn Bhd dealer Leo Goh Boon Hao said weak sentiment clouded the market amidst continued tension between the US and China.
“The Comex gold futures traded between US$1,180 and US$1,300 per ounce (this year).
“On the local bourse, the gold futures price declined to its 52-month low of RM155.20 a gramme in Aug 16, from a 52-month high of RM170. 90 recorded on Jan 15,” Goh said. — Bernama