CPO prices expected to remain under pressure on weak demand
PETALING JAYA: Crude palm oil (CPO) prices are expected to remain under pressure as the Covid-19 outbreak and lower prices of soybean oil and gasoil impede demand, according to MIDF Research.
“We opine that there are several factors at play to keep demand under pressure in coming months. The worsening Covid-19 outbreak that is causing a slowdown in business activities, logistical constraints and restricted travelling will continue to put a dent in CPO demand from major economies such as China and the EU.
“In addition, the demand for CPO as feedstock will be met with resistance as the current price is becoming unattractive as compared to soybean oil and gasoil. This will cause buyers and consumers to switch to other substitute oils as a cheaper and more appealing alternative,“ MIDF said in a report.
In February 2020, the average CPO spot price retreated by 10.0% month on month to RM2,410 per tonne level. However, on a year on year (y-o-y) basis, the spot price increased by 27.0%, in anticipation of the lower stockpiles level, tighter production and lower supplies in the export market.
“While the market anticipates tighter supplies due to the higher domestic consumption via higher biodiesel mandate in both Malaysia and Indonesia, we opine that the recent tumble of gasoil to have a negative impact on CPO demand and feasibility as a biodiesel feedstock from a financial standpoint.”
The research house noted that the palm oil is currently trading at a huge premium to gasoil of about US$197 per tonne vs. average discount of US$19 per tonne in the past year. Meanwhile, demand for soybean also remains weak, brought about by the African swine fever and H1N1 virus, leading to narrowing spread between soybean oil and palm oil.
“On a positive note, we posit that the lower inventory level and moderated output level to partially support CPO price and the year-to-date CPO price remains elevated at about RM2,800 per tonne.”
MIDF said the current spot price is on a downtrend, falling to about RM2,270 per tonne due to negative sentiments on the weakening export demand ahead and expected higher CPO production.
“Moving forward, we do not expect significant reduction in inventory level as the higher production cycle kicks in. In addition, we also expect export to contract due to challenges faced in the country’s two main export markets India and China.”
MIDF is maintaining its neutral stance on the sector with an unchanged CPO price target of RM2,450 per tonne for 2020.
Meanwhile AllianceDBS Research also believes that the Covid-19 outbreak will continue to result in lower demand for palm oil and hence, lower exports.
However, it expects weak production yields to continue as a result of trees going through its resting period after two years of high production yields, coupled with the haze and El-Nino in Q3’19.
“While we expect production yield for plantation companies to fall in the months to come, the higher y-o-y CPO price would more than offset the decline in earnings caused by lower production.”
Source: TheSunDaily