MALAYSIAN palm oil exporters may be facing stiffer competition in the coming months as Indonesia has proposed to raise palm oil export quotas last Friday (July 1) due to excessive palm oil inventories in the world’s largest producing country.
Following this announcement, crude palm oil (CPO) futures tumbled 4.2% or RM207/metric tonne (MT) to RM4,703/MT, according to PublicInvest Research.
“This does not bode well for Malaysian upstream plantation players as margins are shrinking sharply amid the high production costs,” observed analyst Chong Hoe Leong in a plantation sector update.
Reiterating a “neutral” outlook on the sector, the research house has also maintained its full-year CPO price forecast of RM5,000/MT.
In view of oversupply of palm oil in its domestic market, Jakarta will now allow companies to export seven times the amount of their domestic sales from the current level of five times.
“This will likely increase CPO export volumes from 3.4 million MT to 4.76 million MT – a massive increase of 40% – which should lead to greater competition to Malaysian exporters,” cautioned PublicInvest Research.
“Malaysian palm oil exports for June is expected to fall 10%-13% month-on-month (mom) given a weaker shipment to India and the European Union (EU).”
With regard to the under-utilisation of Malaysian mills, the research house said millers were reported to have temporarily halted production following the plunge in CPO prices as they stand to lose at least RM150,000 for every 100 MT of CPO produced based on current prices.
“The stoppage may range from one day to one week which could potentially affect the oil extraction rate,” explained PublicInvest Research.
“It is worth noting that Malaysian millers have to purchase fresh fruit bunches (FFB) based on the Malaysian Palm Oil Board’s (MPOB) monthly average CPO price of about RM6,200/MT currently (FFB price: about RM1,100/MT) but sell the CPO based on the current daily market price which is about RM5,000/MT.”
Despite the latest development, MIDF Research has retained its “positive” stance on Malaysia’s plantation sector with an unchanged CY2022 CPO price of RM5,500/MT. It anticipates that CPO price will remain elevated in 2H CY2022 with the price level to be supported by:
- Higher price of edible oils on the back of supply concerns amid the prolonged Russia-Ukraine conflict (which disrupted sunflower supply);
- Subdued production outlook for soybean in 2022/2023 due return in La-Nina for a third year in a row in South America (in Brazil and Argentina compounded by lower planted area in the US);
- Improved demand outlook on improved economic activities.
“Despite our positive view on the sector, we do expect the CPO price to ease in 2H CY2022 but at a gradual pace on concern of inflationary pressure globally after achieving higher-than-expected CPO price in 1H CY2022,” justified MDF Research.
“Key risks to CPO prices are (i) unprecedented new variants appear which resulting another lockdown worldwide; (ii) above expectation stockpiles and supply of soybean and soybean oil; and (iii) changing policy in importing countries.”
The research house’s two top picks for the sector are Kuala Lumpur Kepong Bhd (“buy”; target price: RM31.50) and TSH Resources Bhd (“buy”; TP: RM1.90). – July 4, 2022
