24.12.2019 (S&P Global) - Singapore — Analysts and traders fixated on the elevated crude palm oil stockpile at the beginning of 2019 are left cheering as CPO stocks fell across Malaysia and Indonesia while prices rallied to MR 2,684/mt (US $648/mt) December 4 against MR 2,065/mt at the beginning of the year.

The PO-GO spread between gasoil and CPO futures, which opened at the beginning of the year, pushed into positive territories in the last quarter, leaving discretionary blending a distant possibility.

PALM STOCK DRAW

Indonesia and Malaysia will enter 2020 with rapidly declining inventories. Malaysian palm oil inventories fell below 3 million mt in March and touched 2.256 million mt in November, data from the Malaysian Palm Oil Board showed, while Indonesian inventories stood at 3.8 milllion mt in August 2019, according to data from the Indonesian Palm Oil Association, or GAPKI. That was down from 4.592 million mt in August 2018.

A climb in domestic consumption helped pushed Indonesia CPO inventories lower. Domestic consumption climbed to 1.512 million mt in August 2019 versus 1.072 million mt in August 2018, driven primarily by the B20 blending mandate that kicked off in the latter part of 2018.

On the supply side, growth in 2020 will continue to be limited, affected by this year's very dry weather and less fertilizer applied by small players during 2019 because of low CPO prices, according to Richard Fung, director of investor relations at Golden Agri-Resources.

Sathia Varqa, owner and co-founder of Singapore-based Palm Oil Analytics, forecast that Indonesia will produce 45 million mt of CPO for 2019 and 46 million mt of CPO in 2020.

RISING MALAYSIAN EXPORTS

Malaysian exports had been climbing because of demand from China as well as India, particularly for RBD palm olein product, as the result of earlier favorable treatment.

At the beginning of the year, India's tax structure for RBD palm olein from Malaysia was lowered from 54% to 45%, giving Malaysia palm oil exports a boost, while the rest of Association of Southeast Asian Nations imports were taxed at 50%, though that changed in September, when India raised the import tax on Malaysian refined palm oil to 50% from 45% for six months. The aim was to protect the local refining sector and limit imports of refined palm oil.

The tax could continue after the six months, according to a source.

Malaysian CPO production was expected to fall to 19.5 million-19.8 million mt because of lower rainfall and fertilizer usage. 2019 production is expected to come in around 20.3 million mt, Sathia said.

Going forward, palm exports, if prices stay at close to the soybean oil level, would see stiff competition from soybean oil, though stalling CPO production plus blending needs for palm oil methyl ester will ensure the CPO supply remains tight.

Malaysia placed a 5% export tax in January 2020 for CPO and Indonesia imposed a $50/mt export levy on CPO, also starting in January 2020, which could affect overseas sales. Nonetheless, with palm oil still priced cheaper than sunflower oil and an insufficient supply of soybean oil, demand for palm oil should stay steady.

INDONESIAN PME EXPORTS SINK

The Indonesian domestic biodiesel mandate expected to increase in January 2020, to B30 blends will result in Indonesian capacity been fully utilized all year as PME could be used in Indonesia year-round as the country does not have winter months.

Most producers had reported preparing for the upcoming B30 blending mandate and were expecting their capacity to be utilized up to 70% to 90% for the domestic mandate, and some were expecting less than 100,000 mt of exports in 2020.

The European Commission had imposed anti-subsidy measures of 8%-18% on biodiesel imports from Indonesia, which would see much of Indonesian PME exports shut out of Europe. With current PME versus gasoil prices, China is not expected to purchase much PME for discretionary blending, either, though the loss of external demand on PME is not expected to have much effect on CPO prices or PME production in Indonesia.

Sathia said: "9-10 million tons of CPO are expected to be utilized to produce 10.6 million kilo liters of biodiesel so that the targeted consumption of 9.60 million kilo liters can be achieved in 2020."

A total of 9.6 million kiloliters quotas of the biodiesel mandate was awarded to 18 companies, including state-oil company PT Pertamina, Wilmar International, Musim Mas and PT Shell Indonesia.

In Malaysia, B20 blending mandate is expected to consume 1.7 million-2 million mt of CPO to produce 2.2 million kiloliters of PME. Malaysia would gain from Indonesia's loss, with PME from the country entering Europe once the winter ends.

WASTE OIL

Besides PME, European buyers had also been offtaking waste oil, such as used cooking oil, to satisfy demand.

Current UCOME prices at above $1,000/mt FOB China while UCO prices are at above $700/mt, which had prompted many UCO factories in China to consider a switch to production of UCOME.

That could mean UCOME prices coming under pressure.