12.08.2020 (www.thestar.com.my) - PETALING JAYA: Crude palm oil (CPO) prices rode the uptrend wave of the loosening in movement restrictions globally, which led to a strong demand in July on the back of a decline in production.

It has been on a strong rebound since the plunge to below RM2,000 per tonne in May, closing at RM2,646 yesterday but there were doubts if the rally in CPO prices would be sustainable.

The pent-up demand for CPO led to the ongoing increase in exports last month by 4.19% month-on-month (m-o-m) to 1.78 million tonnes.

This, coupled with lower output levels, resulted in a 10.55% m-o-m decline in palm oil inventory to 1.7 million tonnes.

While the CPO prices would maintain at current levels this month, most analysts are expecting it to moderate to the range of RM2,300 to RM2,400 per tonne by the year end as demand and supply starts normalising and when output begins to peak in coming months.

All research houses that provided their guidance for the CPO price yesterday expected it to soften towards the end of 2020.

CGS-CIMB Research said the stockpile in July was around 1% to 2% higher than Reuters’ poll and Bloomberg’s consensus forecast and that the higher-than-expected stocks and strong production in July, relative to the historical figures, will likely keep the rally in CPO prices in check.

“The good news is that we had two consecutive months of strong exports which pushed down stocks to the lowest level since June 17, ” it said in a research note, adding that the export growth in July was a record high, thanks to strong demand from India and the European Union (EU).

A total of 455.3 tonnes of palm oil were exported to India last month, which was almost back to the level seen before India imposed restrictions on refined palm oil exports. This was an 85% m-o-m growth.

The EU took in 170.2 tonnes, which was a 34% m-o-m jump.

The research house attributed this to Malaysia’s recent decision to cut the export tax for CPO to zero in June.

“The restocking activity is due partly to low stocks in consuming countries and stronger demand from end customers as the economy reopens.

“We expect restocking activities to continue in August at a slower pace, in view of the zero export tax in Malaysia and low palm oil stock levels in China and India, ” CGS-CIMB said.

The research house said demand for palm oil for food consumption was expected to improve ahead of the mid-autumn festival on Oct 1 but this could come at the expense of weaker biodiesel demand as the rising CPO price has further worsened the economic viability of biodiesel which may affect the fulfillment of B30 in Indonesia.

It projected that CPO would trade in the range of RM2,400 to RM2,800 per tonne this month, but the upside could be capped as its estimates showed that at a crude oil price of US$42 per barrel and for B30 to be viable based on current funding availabilities, the CPO price would need to average at around RM2,255 per tonne in the second half of 2020.

An analyst concurred with the view, saying that the CPO prices are about to face some pressure when its output starts to peak, coupled with the harvesting season of soybeans in the United States.

“The CPO price is a little on the higher side and it’s about time it starts to moderate as demand will surely come off with China and India well-stocked up now, ” he said.

Kenanga Research advised caution on the sector, questioning the sustainability of large exports after stockpiling activities are completed.

It pointed out that there were already signs that China’s exports were slowing down, after it declined 17.9% m-o-m in July.

The country had reopened its economy earlier than India.

“While this period may offer a brief relief to CPO prices, we emphasise the peak production season that is yet to come.

“Most planters, especially those with estates primarily in Malaysia, believe that we should see another peak production from September to October.

“Our view is in line with planters, ” it said in a note yesterday, adding that the recent spike in exports was mainly fuelled by inventory replenishment efforts from India and China, alongside the zero export tax.

Moving forward, Kenanga is of the view that the pent-up demand will gradually fizzle out as India’s oils and fats ending stock for July has already recovered to 806,000 tonnes.

It also expected China to ramp up its soybean purchases which could possibly result in lower palm oil purchases.

Another factor that could discourage exports was the high CPO price. On a whole, the research house projected a 4.5% m-o-m decline in exports this month to 1.7 million tonnes.

It said data from cargo surveyors up to Monday has shown an average decline in exports of 5.5% m-o-m, corroborating its views.

Maybank IB Research said there was increasing chatter that Indonesia’s July output was very weak, which aided Malaysia’s exports.

It added that the CPO spot price would likely be supported at the range of RM2,500 in August as the neighbouring country’s peak output would likely be delayed and also due to the low stockpile in Malaysia.

“Still, we expect CPO price to weaken thereafter when output peaks between September and November.”

RHB Research also cautioned of a possible pullback in prices on peak output and post-festive demand in the fourth quarter, especially in view of CPO’s small discount to soybean (SBO) currently.

It noted that CPO is not competitive now as the price gap with SBO narrowed to US$9.70 from US$45 last month.

The research house suggested that once restocking activities were done, price sensitive countries would shift to SBO.

https://www.thestar.com.my/business/business-news/2020/08/12/softening-cpo-prices