Oversupply of palm oil drags price, says MIDF

(AFP pic)

PETALING JAYA: Malaysia’s palm oil inventory registered a decline of 6.7% to three million tonnes for January 2019, its first fall in seven months.

Malaysian Industrial Development Finance Bhd (MIDF), in a research note, said both production and export demand was higher than expected.

The growth in exports was mainly due to the increase in demand from the EU, China and India as well as other new export destinations.

The oversupply of Malaysian palm oil, negative sentiments from the EU, and competition among oil companies continue to drag the prices of crude palm oil (CPO) down, MIDF said.

Biodiesel mandates in both Malaysia and Indonesia are viewed as a positive development to boost domestic consumption and act as a diversification strategy.

“We maintain a neutral stance on the sector as inventory declined but remained elevated,” the MIDF note said.

The inventory level remained elevated in view of the higher-than-expected output level. This was partially mitigated by higher-than-expected export demand, mainly from EU countries and other export markets.

On a year-on-year (yoy) basis, January 2019 inventory increased by +17.8%, primarily due to record-high stockpiles as of December 2018. The research house said stockpiles were projected to continue declining, albeit at a moderating pace, in line with the historically low seasonal production period and rising export demand.

CPO prices have seen a recovery (+13.5% mom) after a record low in December 2018 to RM2,037/mt in January 2019.

This indicates that output might still be at the tail-end of its peak period and is declining at a moderating pace. The fall mainly resulted from lower production in Sabah (-8.0% mom) and Sarawak (-9.5% mom).

On a yoy comparison, production growth increased by +9.5% yoy as a result of higher production mostly from Perak (+26.0% yoy), Pahang (+19.3% yoy) and Johor (+8.5% yoy).

On a sequential basis, January 2019 exports rose by +21.0% mom to approximately 1.7 million tonnes. MIDF said the demand from China was mainly boosted by the festive purchase and lower demand for soybean due to the African swine fever phenomenon.

India’s demand improved after the implementation of lower import duties for palm oil-related products and its preferential trade agreement with Malaysia.

The palm oil industry continues to face sharp criticism from environmentally sensitive countries, particularly the EU which was the second largest export destination for Malaysian palm oil.

The French and Norwegian governments have passed an amendment to exclude palm oil as biodiesel feedstock starting from 2020.

MIDF said it was maintaining its CPO price target of RM2,280/mt for 2019.