How Malaysia is growing more vulnerable to Indonesia’s palm oil policy

SPOT crude palm oil (CPO) price in Malaysia has fallen 30% to RM4,698/metric tonne (MT) since Indonesia removed its export ban on May 23 from a peak of circa RM8,500/MT – a stark illustration of how Indonesia’s excess palm oil capacity can be a bane to Malaysia’s CPO price.

The bulk (91%) of the price declines occurred since June 10 after Indonesia provided more clarity on the export process as it replaced the export ban with the Domestic Market Obligation (DMO), according to CGS-CIMB Research.

The DMO requires firms to supply a portion of their products to the domestic market via Jakarta’s bulk cooking oil programme by linking their DMO volumes to their export permits and quotas/rights.

Till yesterday (July 5), Indonesia said it has issued export permits for a total of 2.44 million MT of palm oil since May 2022.

Of this, 1.35 million tonnes of permits were for the DMO programme while 1.09 million MT were part of the flush out (FO) programme. Total palm oil exports realised have been 1.66 million MT (DMO: 900,000 MT; FO: 760,000 MT) thus far.

“Our estimates suggest that the changes in export policy throughout 1H 2022 may have led Indonesia’s palm oil stocks to rise to as high as 8 million to 8.5 million MT by end-June 20222F (vs 3.6 million MT as of end-December 2021 and 6.1 million MT as of end-April 2022),” research head Ivy Ng Lee Fang and analyst Nagulan Ravi pointed out in an agribusiness update.

“As such, we estimate Indonesia will need to speed up exports over the next few months to 3 million-3.5 million MT/month to clear stocks ahead of the peak production season.”

Moreover, Jakarta has further signalled that it will be facilitating this process to help raise domestic CPO prices. It has recently changed the DMO ratio to seven times of their domestic sales, from a previous five-time ratio to help accelerate exports.

“We are of the view that to clear the excess stockpile, Indonesia’s palm producers will need to entice buyers by lowering CPO prices – causing local and international CPO prices to fall significantly in recent weeks,” projected CGS-CIMB Research.

“We think CPO prices could stay weak during the adjustment period and trade at larger discounts over competing edible oils until Indonesia’s palm oil stocks fall to the 4 million-5 million MT level.”

This, coupled with concerns over slower global economic growth, could keep CPO prices in the RM4,000-5,000/MT range in the near term, according to the research house.

In tandem with competition from Indonesia palm oil, CGS-CIMB Research expects Malaysia’s palm oil inventory to probably grow by 10.5% month-on-month (mom) and 4.2% year-on-year (yoy) in June to 1.68 million MT due to higher output and lower exports.

“This will push the palm oil inventory level to a seven-month high. Our June 2022F forecast palm oil stock level in Malaysia of 1.68 million MT is 11% below the 10-year historical June average of 1.89 million MT. Official figures will be released on July 12,” noted CGS-CIMB Research which reiterated its “neutral” outlook on the plantation sector. – July 6, 2022

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